<PAGE>
SECURITY FUNDS PROSPECTUS SUPPLEMENT
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SECURITY INCOME FUND
SECURITY MUNICIPAL BOND FUND
SECURITY CASH FUND
MEMBERS OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 HARRISON, TOPEKA, KANSAS 66636-0001
SUPPLEMENT DATED JULY 26, 2000
TO PROSPECTUS DATED MAY 1, 2000
The Fund's exchange privilege is amended on the following accounts for which the
Investment Manager serves as custodian:
* 403(b)(7) accounts
* SEPP accounts (simplified employee pension plans)
* SIMPLE Plans (IRA and 401(k))
Effective September 26, 2000, shareholders of such accounts may no longer
exchange their shares of Diversified Income Fund or High Yield Fund for shares
of Cash Fund. (In addition, shares of Cash Fund are no longer available for
purchase under such accounts as of September 26, 2000.)
THIS PROSPECTUS IS AMENDED BY DELETING THE SECTION, "EXCHANGE PRIVILEGE," IN ITS
ENTIRETY AND REPLACING IT WITH THE FOLLOWING.
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Funds may exchange
those shares for shares of Diversified Income Fund or High Yield Fund, or for
shares of the other mutual funds distributed by the Distributor, which currently
include Security Growth and Income, Equity, Global, Total Return, Social
Awareness, Mid Cap Value, Small Cap Growth, Enhanced Index, International,
Select 25, Large Cap Growth, Technology and Ultra Funds. Shareholders who hold
their shares in a tax-qualified retirement plan may also exchange shares of the
Funds for shares of Capital Preservation Fund, but may not exchange shares of
the Funds for shares of Municipal Bond Fund. Shareholders, except those who have
purchased through the following custodial accounts of the Investment Manager,
403(b)(7) accounts, SEPP accounts and SIMPLE Plans, may also exchange their
shares for shares of Cash Fund.
Exchanges may be made only in those states where shares of the fund into which
an exchange is to be made are qualified for sale. No service fee or sales charge
is presently imposed on such an exchange. Shares of a particular class of the
Funds may be exchanged only for shares of the same class of another fund
distributed by the Distributor or for shares of Cash Fund, if available, which
offers a single class of shares. Any applicable contingent deferred sales charge
will be imposed upon redemption and calculated from the date of the initial
purchase without regard to the time shares were held in Cash Fund.
For tax purposes, an exchange is a sale of shares that may result in a taxable
gain or loss. Special rules may apply to determine the amount of gain or loss on
an exchange occurring within ninety days after purchase of the exchanged shares.
Exchanges of Class A shares from Diversified Income, High Yield and Municipal
Bond Funds are made at net asset value without a front-end sales charge if (1)
the shares have been owned for at least 90 consecutive days prior to the
exchange, (2) the shares were acquired pursuant to a prior exchange from a
Security Fund which assessed a sales charge on the original purchase, or (3) the
shares were acquired as a result of the reinvestment of dividends or capital
gains distributions. Exchanges of Class A shares from Diversified Income, High
Yield and Municipal Bond Funds, other than those described above, are made at
net asset value plus the sales charge described in the prospectus of the other
Security Fund being acquired, less the sales charge paid on the shares of these
Funds at the time of original purchase.
Because Cash Fund does not impose a sales charge or commission in connection
with sales of its shares, any exchange of Cash Fund shares acquired through
direct purchase or reinvestment of dividends will be based on the respective net
asset values of the shares involved and a sales charge will be imposed equal to
the sales charge that would be charged such shareholder if he or she were
purchasing for cash.
Shareholders should contact the Fund before requesting an exchange in order to
ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Investment Manager
will first cause to be exchanged those shares which would not be subject to any
sales charges. The terms of an employee-sponsored retirement plan may affect a
shareholder's right to exchange shares as described above. Contact your plan
sponsor or administrator to determine if all of the exchange options discussed
above are available under your plan.
Exchanges are made upon receipt of a properly completed Exchange Authorization
form. A current prospectus of the fund into which an exchange is made will be
given to each stockholder exercising this privilege.
To exchange shares by telephone, a shareholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a shareholder may exchange shares by telephone by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day. The exchange privilege, including telephone exchanges, may be
changed or discontinued at any time by either the Investment Manager or the
Funds upon 60 days' notice to shareholders.
<PAGE>
SECURITY FUNDS
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PROSPECTUS
MAY 1, 2000,
AS SUPPLEMENTED JULY 26, 2000
* Security Diversified Income Fund (Formerly U.S. Government Fund)
* Security High Yield Fund
* Security Municipal Bond Fund
* Security Cash Fund
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The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
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[SDI LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
TABLE OF CONTENTS
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FUNDS' OBJECTIVES........................................................... 2
Security Diversified Income Fund........................................ 2
Security High Yield Fund................................................ 2
Security Municipal Bond Fund............................................ 2
Security Cash Fund...................................................... 2
FUNDS' PRINCIPAL INVESTMENT STRATEGIES...................................... 2
Security Diversified Income Fund........................................ 2
Security High Yield Fund................................................ 3
Security Municipal Bond Fund............................................ 4
Security Cash Fund...................................................... 5
MAIN RISKS.................................................................. 5
Interest Rate Risk...................................................... 5
Credit Risk............................................................. 5
Prepayment Risk......................................................... 5
Special Risks Associated with Mortgage-Backed Securities................ 5
Special Risks Associated with Interest Rate Swap Agreements............. 6
Options and Futures..................................................... 6
Foreign Securities...................................................... 6
Restricted Securities................................................... 6
High Yield Securities................................................... 6
Municipal Market Risk................................................... 6
Lack of Diversification................................................. 6
Additional Information.................................................. 6
PAST PERFORMANCE............................................................ 6
FEES AND EXPENSES OF THE FUNDS.............................................. 10
INVESTMENT MANAGER.......................................................... 12
Management Fees......................................................... 12
Portfolio Managers...................................................... 12
BUYING SHARES............................................................... 13
Class A Shares.......................................................... 13
Class A Distribution Plan............................................... 13
Class B Shares.......................................................... 13
Class B Distribution Plan............................................... 13
Class C Shares.......................................................... 14
Class C Distribution Plan............................................... 14
Cash Fund............................................................... 14
Waiver of Deferred Sales Charge......................................... 15
Confirmations and Statements............................................ 15
SELLING SHARES.............................................................. 15
By Mail................................................................. 15
By Telephone............................................................ 16
By Broker............................................................... 16
Cash Fund............................................................... 16
Payment of Redemption Proceeds.......................................... 16
DIVIDENDS AND TAXES......................................................... 16
Tax on Distributions.................................................... 16
Taxes on Sales or Exchanges............................................. 17
Backup Withholding...................................................... 17
DETERMINATION OF NET ASSET VALUE............................................ 17
SHAREHOLDER SERVICES........................................................ 17
Accumulation Plan....................................................... 17
Systematic Withdrawal Program........................................... 17
Exchange Privilege...................................................... 18
Retirement Plans........................................................ 19
GENERAL INFORMATION......................................................... 19
Shareholder Inquiries................................................... 19
INVESTMENT POLICIES AND MANAGEMENT PRACTICES................................ 19
Convertible Securities.................................................. 20
Foreign Securities...................................................... 20
Asset-Backed Securities................................................. 20
Mortgage-Backed Securities.............................................. 20
Restricted Securities................................................... 21
Lower Rate Debt Securities.............................................. 21
U.S. Government Securities.............................................. 21
Guaranteed Investment Contracts ("GICs")................................ 21
Cash Reserves........................................................... 22
Borrowing............................................................... 22
Futures and Options..................................................... 22
Swaps, Caps, Floors and Collars......................................... 22
When-Issued Securities and Forward Commitment Contracts................. 22
Portfolio Turnover...................................................... 23
FINANCIAL HIGHLIGHTS........................................................ 23
APPENDIX A
Description of Short-Term Instruments................................... 28
Description of Commercial Paper Ratings................................. 28
Description of Corporate Bond Ratings................................... 28
APPENDIX B
Description of Municipal Bond Ratings................................... 30
Ratings of Short-Term Securities........................................ 31
APPENDIX C
Reduced Sales Charges................................................... 32
SECURITY CASH FUND APPLICATION.............................................. 34
<PAGE>
FUNDS' OBJECTIVES
Described below are the investment objectives for each of the Funds. Each Fund's
Board of Directors may change the Fund's investment objective without
shareholder approval. As with any investment, there can be no guarantee the
Funds will achieve their investment objectives.
SECURITY DIVERSIFIED INCOME FUND -- The Diversified Income Fund seeks to provide
a high level of interest income with security of principal.
SECURITY HIGH YIELD FUND -- The High Yield Fund seeks high current income.
Capital appreciation is a secondary objective.
SECURITY MUNICIPAL BOND FUND -- The Municipal Bond Fund seeks to obtain as high
a level of interest income exempt from regular federal income taxes as is
consistent with preservation of stockholders' capital.
SECURITY CASH FUND -- The Cash Fund seeks as high a level of current income as
is consistent with preservation of capital and liquidity.
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WHAT DOES IT MEAN TO "PRESERVE CAPITAL"? CAPITAL, also called PRINCIPAL, refers
to the amount of money that you invest in a fund. If you choose to have your
dividends and other distributions reinvested in additional shares of a fund, the
amount of the distributions will be added to your initial investment to increase
the amount of your capital. A fund that seeks to preserve capital attempts to
conserve the investor's purchase payments and reinvested dividends. However,
there can be no assurance that any fund will be successful in preserving your
capital.
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FUNDS' PRINCIPAL INVESTMENT STRATEGIES
SECURITY DIVERSIFIED INCOME FUND -- The Fund pursues its objective, under normal
circumstances, by investing primarily in a diversified portfolio of investment
grade debt securities. The Fund expects to maintain a weighted average duration
of 4 to 10 years. The debt securities in which the Fund invests will primarily
be domestic securities, but may also include dollar denominated foreign
securities. To manage risk, Security Management Company, LLC (the "Investment
Manager") diversifies the Fund's holdings among asset classes and individual
securities. Some of the asset classes in which the Fund may invest include
investment grade corporate debt securities, high yield debt securities (also
known as "junk bonds"), investment grade mortgage-backed securities, investment
grade asset-backed securities, U.S. Government securities and total return swap
agreements.
The Fund may also invest a portion of its assets in options and futures
contracts. These instruments may be used to hedge the Fund's portfolio, enhance
income, or as a substitute for purchasing or selling securities. The Fund may
invest in restricted securities as described under "Main Risks," page 5.
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DEBT SECURITIES, which are also called BONDS or DEBT OBLIGATIONS, are like a
loan. The issuer of the bond, which could be the U.S. Government, a corporation,
or a city or state, borrows money from investors and agrees to pay back the loan
amount (the PRINCIPAL) on a certain date (the MATURITY DATE). Usually, the
issuer also agrees to pay interest on certain dates during the period of the
loan. Some bonds, such as ZERO COUPON BONDS, do not pay interest, but instead
pay back more at maturity than the original loan. Most bonds pay a fixed rate of
interest (or income), although some bonds' interest rates may adjust
periodically based upon a market rate. Payment-in-kind bonds pay interest in the
form of additional securities.
INVESTMENT GRADE SECURITIES are debt securities that have been determined by a
rating agency to have a medium to high probability of being paid, although there
is always a risk of default. Investment grade securities are rated BBB, A, AA or
AAA by Standard & Poor's Corporation and Fitch Investors Service, Inc. or Baa,
A, Aa or Aaa by Moody's Investors Service.
TOTAL RETURN SWAP AGREEMENTS involve the payment by the Fund of a floating rate
of interest in exchange for the total rate of return on a benchmark index. For
example, instead of investing in the securities of a particular benchmark index,
the Fund could enter into a swap agreement and receive the total return of the
benchmark index, in return for a floating rate payment to the counterparty.
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The Investment Manager uses a "bottom-up" approach in selecting asset classes
and securities. The Investment Manager emphasizes rigorous credit analysis and
relative value in selecting securities. The Investment Manager's credit analysis
includes looking at factors such as an issuer's management experience, cash
flow, position in its market, capital structure, general economic factors and
market conditions, as well as world market conditions.
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BOTTOM-UP APPROACH means that the Investment Manager looks primarily at
individual issuers against the context of broader market factors. Some of the
factors which the Investment Manager looks at when analyzing individual issuers
include relative earnings growth, profitability trends, the issuer's financial
strength, valuation analysis and strength of management.
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To determine the relative value of a security, the Investment Manager compares
the credit risk and yield of the security to the credit risk and yield of other
securities of the same or another asset class. Higher quality securities tend to
have lower yields than lower quality securities. Based upon current market
conditions, the Investment Manager will consider the relative risks and rewards
of various asset classes and securities in selecting securities for the Fund.
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CREDIT QUALITY RATING is a measure of the issuer's expected ability to make all
required interest and principal payments in a timely manner.
An issuer with the highest credit rating has a very strong degree of certainty
(or safety) with respect to making all payments. An issuer with the
second-highest credit rating has a strong capacity to make all payments, but the
degree of safety is somewhat less. An issuer with the lowest credit quality
rating may be in default or have extremely poor prospects of making timely
payment of interest and principal. See Appendix A and B for a more complete
discussion of the meaning of the different credit quality ratings.
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The Investment Manager may determine to sell a security (1) if it can purchase a
security with a better relative value; (2) if a security's credit rating has
been changed; (3) if the Investment Manager believes diversification of the Fund
is compromised due to mergers or acquisitions; or (4) to meet redemption
requests.
Under adverse market conditions, the Fund could invest some or all of its assets
in cash and debt obligations consisting of repurchase agreements and money
market instruments of foreign or domestic issuers and the U.S. and foreign
governments. Although the Fund would do this only in seeking to avoid losses,
the Fund may be unable to pursue its investment objective during that time, and
it could reduce the benefit from any upswing in the market.
SECURITY HIGH YIELD FUND -- The Fund pursues its objective under normal
circumstances by investing in a broad range of high-yield, high risk debt
securities rated in medium or lower rating categories or determined by the
Investment Manager to be of comparable quality ("junk bonds"). However, the Fund
will not invest in debt securities which, at the time of purchase, are in
default. The debt securities in which the Fund invests will primarily be
domestic securities, but may also include dollar denominated foreign securities.
The Fund may also invest in equity securities and securities with equity
characteristics, including common and preferred stocks, American Depositary
Receipts, warrants and rights and real estate investment trusts ("REITS"). The
Fund's average dollar weighted maturity is expected to be between 5 and 15
years. Under normal circumstances, at least 65% of the Fund's total assets will
be invested in high yielding, high risk debt securities.
The Fund may also invest a portion of its assets in options and futures
contracts. These instruments may be used to hedge the Fund's portfolio, enhance
income, or as a substitute for purchasing or selling securities. The Fund may
invest in restricted securities as described under "Main Risks," page 5.
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HIGH YIELD SECURITIES are debt securities that have been determined by a rating
agency to have a lower probability of being paid and have a credit rating of BB
or lower by Standard & Poor's Corporation and Fitch Investors Service, Inc. or
Ba or lower by Moody's Investors Service. These securities are more volatile and
normally pay higher yields than investment grade securities.
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The Investment Manager uses a "bottom-up" approach in selecting high yield
securities. The Investment Manager emphasizes rigorous credit analysis and
relative value in selecting securities. The Investment Manager's credit analysis
includes looking at factors such as an issuer's debt service coverage (I.E., its
ability to make interest payments on its debt), the issuer's cash flow, general
economic factors and market conditions and world market conditions.
To determine the relative value of a security, the Investment Manager compares
the security's credit risk and yield to the credit risk and yield of other
securities. The Investment Manager is looking for securities that appear to be
inexpensive relative to other comparable securities and securities that have the
potential for an upgrade of their credit rating. A rating upgrade typically
would increase the value of the security. The Investment Manager focuses on an
issuer's management experience, position in its market, and capital structure in
assessing its value. The Investment Manager seeks to diversify the Fund's
holdings among securities and asset classes.
The Investment Manager may determine to sell a security (1) if it can purchase a
security with a better relative value; (2) if a security's credit rating has
been changed; or (3) to meet redemption requests.
Under adverse market conditions, the Fund could invest some or all of its assets
in cash, U.S. Government securities, commercial notes or money market
instruments. Although the Fund would do this only in seeking to avoid losses,
the Fund may be unable to pursue its investment objective during that time, and
it could reduce the benefit from any upswing in the market.
SECURITY MUNICIPAL BOND FUND -- The Fund pursues its objective under normal
circumstances by investing at least 80% of its net assets in investment grade
municipal bond obligations that are exempt from regular federal income taxes.
The Fund intends to emphasize investments in municipal securities with long-term
maturities between 12 and 30 years, and expects to maintain a dollar-weighted
average duration of 7 to 11 years. A portion of the Fund's dividends may be
subject to the federal alternative minimum tax. Accordingly, the Fund may not be
a suitable investment for individuals or corporations that are subject to the
federal alternative minimum tax.
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MUNICIPAL SECURITIES are debt obligations of states, cities, towns, and other
political subdivisions, agencies or public authorities, which pay interest that
is exempt from regular federal income tax. Municipal securities also include
debt obligations of other qualifying issuers such as Puerto Rico, Guam, the
Virgin Islands and Native American Tribes. Municipal securities are often issued
to raise money for public services and projects such as schools, hospitals and
public transportation systems. Some municipal securities (for example,
INDUSTRIAL DEVELOPMENT BONDS) may be backed by private companies and used to
provide financing for corporate facilities or other private projects. In most
states, municipal securities issued by entities within the state are also exempt
from that state's taxes. Municipal securities may be in the form of BONDS, NOTES
and COMMERCIAL PAPER, may have a fixed or floating rate of interest, or be
issued as ZERO COUPON BONDS.
MUNICIPAL BONDS are divided into two principal classifications: GENERAL
OBLIGATION BONDS and REVENUE BONDS. A GENERAL OBLIGATION BOND is backed by the
full faith, credit and taxing power of the issuer. A REVENUE BOND is linked to
an income-producing project that pays interest and repays principal only to the
extent adequate funds are generated by the project. A REVENUE BOND may include
PRIVATE ACTIVITY BONDS.
DURATION is a measure of a bond's price volatility. It is a tool used to
approximate the percentage change in a bond's price for a given change in its
yield. A duration of 5, for example, means the price of the bond will change by
approximately 5% in response to a 1% change in yield. In general, duration rises
with maturity (the date at which a bond is due and payable) and falls with the
frequency of coupon payments and as yield rises.
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The Fund's Sub-Adviser is Salomon Brothers Asset Management Inc. The Fund
invests primarily in investment grade municipal securities, which represent a
large market segment of the municipal market and offer a higher degree of
liquidity than do municipal securities in lower rating categories.
To determine which securities to invest in, the Sub-Adviser uses a "top-down"
approach, first determining a sector, then a geographic region and then
selecting individual securities within that sector/geographic region.
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TOP-DOWN APPROACH means that the Sub-Adviser looks first at the broad market
factors and on the basis of those factors, chooses certain sectors or industries
within the overall market. It then looks at individual companies within those
sectors or industries.
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The Sub-Adviser seeks to identify and capture relative value within the
municipal bond market by analyzing the following factors:
* Current market environment
* Sector trends
* Credit quality
* Security characteristics (for example, type of issuer, callability, size of
issue)
* Tax considerations
The Sub-Adviser uses an analytical database in analyzing sector trends and
security characteristics. The Sub-Adviser also uses the database to monitor how
the Fund's portfolio will perform in different interest rate environments versus
the Fund's benchmark index ("scenario stress testing").
The Sub-Adviser may determine to sell securities (1) if a security's credit
rating has been changed; (2) if it can purchase a security with a better
relative value; (3) based on the results of scenario stress testing; or (4) to
meet redemption requests.
Under adverse market conditions, the Fund could invest in cash, short-term
municipal bonds and fixed-income obligations on which the interest is subject to
federal income tax. Although the Fund would do this only in seeking to avoid
losses, the Fund may be unable to pursue its investment objective during that
time, and it could reduce the benefit from any upswing in the market.
SECURITY CASH FUND -- The Fund pursues its objective by investing in a
diversified and liquid portfolio of primarily the highest quality money market
instruments, which may include restricted securities as described under "Main
Risks," page 5. Generally, the Fund is required to invest at least 95% of its
assets in the securities of issuers with the highest credit rating, with the
remainder invested in securities with the second-highest credit rating. The Fund
also is designed to maintain a constant net asset value of $1.00 per share.
Although Cash Fund seeks to preserve the value of your investment at $1.00 per
share, it is possible to lose money by investing in the Fund. The Fund is
subject to certain federal requirements which include the following:
* maintain an average dollar-weighted portfolio maturity of 90 days or less
* buy individual securities that have remaining maturities of 13 months or less
* invest only in high-quality, dollar-denominated, short-term obligations.
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A MONEY MARKET INSTRUMENT is a short-term IOU issued by banks or other U.S.
corporations, or the U.S. Government or state or local governments. Money market
instruments have maturity dates of 13 months or less. Money Market instruments
may include certificates of deposit, bankers' acceptances, variable rate demand
notes, fixed-term obligations, commercial paper, asset-backed commercial paper
and repurchase agreements. See Appendix A for a more complete description of the
different money market instruments and credit quality ratings.
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The Investment Manager attempts to increase return and manage risk by (1)
maintaining an average dollar-weighted portfolio maturity within 10 days of the
Fund's benchmark, the Money Fund Report published by IBC Donoghue; (2) selecting
securities that mature at regular intervals over the life of the portfolio; (3)
purchasing only commercial paper in the top two tiers; and (4) constantly
evaluating alternative investment opportunities for diversification without
additional risk.
MAIN RISKS
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Your investment in the Funds is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other governmental agency. The value of an
investment in the Funds will go up and down, which means investors could lose
money.
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INTEREST RATE RISK -- Investments in fixed-income securities are subject to the
possibility that interest rates could rise, causing the value of the Funds'
securities, and share price, to decline. Longer term bonds and zero coupon bonds
are generally more sensitive to interest rate changes than shorter term bonds.
Generally, the longer the average maturity of the bonds in a fund, the more a
fund's share price will fluctuate in response to interest rate changes.
CREDIT RISK -- It is possible that some issuers of fixed-income securities will
not make payments on debt securities held by a Fund, or there could be defaults
on repurchase agreements held by a Fund. Also, an issuer may suffer adverse
changes in financial condition that could lower the credit quality of a
security, leading to greater volatility in the price of the security and in
shares of a Fund. A change in the quality rating of a bond can affect the bond's
liquidity and make it more difficult for the Fund to sell.
PREPAYMENT RISK -- The issuers of securities held by a Fund may be able to
prepay principal due on the securities, particularly during periods of declining
interest rates. Securities subject to prepayment risk generally offer less
potential for gains when interest rates decline, and may offer a greater
potential for loss when interest rates rise. In addition, rising interest rates
may cause prepayments to occur at a slower than expected rate, thereby
effectively lengthening the maturity of the security and making the security
more sensitive to interest rate changes. Prepayment risk is a major risk of
mortgage-backed securities.
SPECIAL RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES -- Diversified Income
Fund and High Yield Fund may invest in mortgage-backed securities. A Fund will
receive payments on its mortgage-backed securities that are part interest and
part return of principal. These payments may vary based on the rate at which
homeowners pay off their loans. When a homeowner makes a prepayment, the Fund
receives a larger portion of its principal investment back, which means that
there will be a decrease in monthly interest payments. Some mortgage-backed
securities may have structures that make their reaction to interest rates and
other factors difficult to predict, making their prices very volatile.
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WHAT ARE MORTGAGE-BACKED SECURITIES? Home mortgage loans are typically grouped
together into "POOLS" by banks and other lending institutions, and interests in
these pools are then sold to investors, allowing the bank or other lending
institution to have more money available to loan to home buyers. When homeowners
make interest and principal payments, these payments are passed on to the
investors in the pool. Most of these pools are guaranteed by U.S. Government
agencies or by government sponsored private corporations - familiarly called
"GINNIE MAES," "FANNIE MAES" and "FREDDIE MACS."
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SPECIAL RISKS ASSOCIATED WITH INTEREST RATE SWAP AGREEMENTS -- Diversified
Income Fund and High Yield Fund may invest in total return swap agreements which
entail both interest rate risk and credit risk. There is a risk that, based on
movements of interest rates in the future, the payments made by the Fund under a
swap agreement will be greater than the payments it received. Credit risk arises
from the possibility that the counterparty will default. If the counterparty
defaults, the Fund's loss will consist of the net amount of contractual interest
payments that the Fund has not yet received. The Investment Manager will monitor
the creditworthiness of counterparties to the Funds' interest rate swap
transactions on an ongoing basis.
OPTIONS AND FUTURES -- Diversified Income Fund and High Yield Fund may use
options and futures to hedge the Fund's portfolio, to gain exposure to a market
without buying individual securities or to increase returns. There is the risk
that such practices may sometimes reduce returns or increase volatility. These
practices also entail transactional expenses.
FOREIGN SECURITIES -- Diversified Income Fund and High Yield Fund may invest in
foreign securities that are U.S. dollar-denominated. Investments in foreign
securities may involve risks in addition to those of U.S. investments, including
increased political and economic risk.
RESTRICTED SECURITIES -- Diversified Income Fund, High Yield Fund and Cash Fund
may invest in securities that are restricted as to disposition under the federal
securities laws, provided that such securities are eligible for resale to
qualified institutional investors pursuant to Rule 144A under the Securities Act
of 1933. The Funds, except Cash Fund, also may purchase securities that are not
eligible for resale under Rule 144A. Since restricted securities may be sold
only in privately negotiated transactions or in a public offering with respect
to which a registration statement is in effect under the Securities Act, their
sale may entail substantial delays and the liquidity of these securities may be
limited.
HIGH YIELD SECURITIES -- High Yield Fund, and to a lesser extent, Diversified
Income Fund, may invest in higher yielding, high risk debt securities. These
investments may present additional risk because they may be less liquid than
investment grade bonds. In addition, the price of high yield securities tends to
be more susceptible to interest rate changes and to real or perceived adverse
economic and competitive industry conditions. High yield securities are subject
to more credit risk than higher quality securities.
MUNICIPAL MARKET RISK -- There are special factors which affect the value of
municipal securities and, as a result, a Fund's share price. These factors
include political or legislative changes, uncertainties related to the tax
status of the securities or the rights of investors in securities.
LACK OF DIVERSIFICATION -- Municipal Bond Fund may invest in issuers of
municipal securities that have similar characteristics, such as geographic
region and source of revenue. Consequently, the Fund's portfolio may be more
susceptible to the risks of adverse economic, political or regulatory
developments than would be the case with a portfolio of securities that is more
diversified as to geographic region and/or source of revenue.
ADDITIONAL INFORMATION -- For more information about the investment program of
the Funds, including additional information about the risks of certain types of
investments, please see the "Investment Policies and Management Practices"
section of the prospectus.
PAST PERFORMANCE
The charts and tables on the following pages provide some indication of the
risks of investing in the Funds by showing changes in each Fund's Class A share
performance from year to year and by showing how each Fund's average annual
total return has compared to those of a broad measure of market performance. Fee
waivers and/or expense reimbursements for Diversified Income Fund reduced the
expenses of that Fund. In the absence of such waiver or reimbursements, the
performance quoted would be reduced. As with all mutual funds, past performance
is not a prediction of future results.
The bar charts on the following pages do not reflect the sales charges
applicable to Class A shares which, if reflected, would lower the returns shown.
Average annual total returns for each Fund's Class A shares include deduction of
the 4.75% front-end sales charge and for Class B shares include the appropriate
deferred sales charge, which is 5% in the first year declining to 0% in the
sixth and later years. The average annual total returns also assume that Class B
shareholders redeem all their shares at the end of the period indicated.
The Board of Directors approved a change in the investment policies of
Diversified Income Fund, effective February 4, 2000. Prior to that change, the
Fund had a policy of investing at least 80% of its total assets in U.S.
Government securities. The information in the bar chart and table reflects the
Diversified Income Fund's performance prior to the recent change of its
investment policies. The Lehman Brothers Government Bond Index is an appropriate
benchmark index based upon the Fund's former investment policies. The Lehman
Brothers Aggregate Bond Index is also included in light of the Fund's current
investment policies.
================================================================================
SECURITY DIVERSIFIED INCOME FUND
================================================================================
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
9.80% 13.80% 5.00% 10.90% -6.50% 21.86% 1.26% 9.19% 9.09% -3.60%
--------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(QUARTERLY 1990-1999)
--------------------------------------------------------------------------------
QUARTER ENDING
Highest 7.34% June 30, 1995
Lowest -3.92% March 31, 1994
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
--------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Class A -8.23% 6.17% 6.35%
Class B -9.36% 5.79% 3.20%*
Lehman Brothers
Government Bond Index -2.15% 7.60% 7.66%
Lehman Brothers
Aggregate Bond Index 1.88% 7.14% 8.02%
--------------------------------------------------------------------------------
*For the period beginning October 19, 1993 (date of inception) to December 31,
1999. Index performance information is only available to the Fund at the
beginning of each month. The Lehman Brothers Government Bond Index average
annual total return for the period October 1, 1993 to December 31, 1999 was
5.38%.
--------------------------------------------------------------------------------
================================================================================
SECURITY HIGH YIELD FUND
================================================================================
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1997 1998 1999
---- ---- ----
12.57% 4.98% -0.51%
--------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(QUARTERLY 1996-1999)
--------------------------------------------------------------------------------
QUARTER ENDING
Highest 3.97% June 30, 1997
Lowest -5.82% September 30, 1999
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
--------------------------------------------------------------------------------
PAST 1 YEAR LIFE OF FUND
(since 8/5/96)
Class A -5.23% 4.93%
Class B -6.28% 4.77%
Lehman Brothers High Yield Index 2.41% 7.01%*
--------------------------------------------------------------------------------
*Index performance is only available to the Fund at the beginning of each
month. The Lehman Brothers High Yield Index is for the period August 1, 1996 to
December 31, 1999.
--------------------------------------------------------------------------------
================================================================================
SECURITY MUNICIPAL BOND FUND
================================================================================
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
6.20% 11.70% 7.30% 11.60% -8.30% 15.48% 2.51% 8.27% 6.05% -3.45%
--------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(QUARTERLY 1990-1999)
--------------------------------------------------------------------------------
QUARTER ENDING
Highest 6.74% March 31, 1995
Lowest -7.21% March 31, 1994
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
(THROUGH DECEMBER 31, 1999)
--------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Class A -8.03% 4.57% 5.07%
Class B -8.96% 4.11% 1.89%*
Lehman Brothers Municipal
Bond Index -2.17% 6.79% 6.83%
--------------------------------------------------------------------------------
*For the period beginning October 19, 1993 (date of inception) to December 31,
1999. Index performance information is only available to the Fund at the
beginning of each month. The Lehman Brothers Municipal Bond Index average
annual total return for the period October 1, 1993 to December 31, 1999 was
4.73%.
--------------------------------------------------------------------------------
================================================================================
SECURITY CASH FUND
================================================================================
[BAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
7.60% 5.20% 2.80% 2.40% 3.43% 5.00% 4.60% 4.90% 4.70% 4.40%
--------------------------------------------------------------------------------
HIGHEST AND LOWEST RETURNS
(QUARTERLY 1990-1999)
--------------------------------------------------------------------------------
QUARTER ENDING
Highest 1.86% June 30, 1990
Lowest 0.56% June 30, 1993
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS & YIELD
(THROUGH DECEMBER 31, 1999)
--------------------------------------------------------------------------------
PAST 1 YEAR PAST 5 YEARS PAST 10 YEARS
Security Cash Fund 4.40% 4.74% 4.49%
7-Day Yield 5.28%
--------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUNDS
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUNDS.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED INCOME, DIVERSIFIED INCOME
SHAREHOLDER FEES HIGH YIELD AND AND CASH
(fees paid directly from your investment) MUNICIPAL BOND FUNDS HIGH YIELD FUNDS FUND
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CLASS A CLASS B CLASS C
SHARES SHARES(1) SHARES
Maximum Sales Charge Imposed on Purchases (as a percentage of offering price) 4.75% None None None
Maximum Deferred Sales Charge (as a percentage of original purchase price or
redemption proceeds, whichever is lower) None(2) 5%(3) 1%(4) None
------------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Class B shares convert tax-free to Class A shares automatically after eight years.
2 Purchases of Class A shares in amounts of $1,000,000 or more are not subject to an initial sales load; however, a deferred sales
charge of 1% is imposed in the event of redemption within one year of purchase.
3 5% during the first year, decreasing to 0% in the sixth and following years.
4 A deferred sales charge of 1% is imposed in the event of redemption within one year of purchase.
</FN>
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
CLASS A
--------------------------------------------------
DISTRIBUTION TOTAL ANNUAL
MANAGEMENT (12b-1) OTHER FUND OPERATING
FEES FEES(4) EXPENSES EXPENSES
Diversified Income Fund ...... 0.35%(5) 0.25% 0.62% 1.22%*
High Yield Fund .............. 0.60% 0.25% 0.47% 1.32%*
Municipal Bond Fund .......... 0.50% 0.25% 0.39% 1.14%*
Cash Fund .................... 0.50% None 0.36% 0.86%
--------------------------------------------------------------------------------
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by the National Association of Securities Dealers, Inc.
Rules.
5 The management fee for Diversified Income Fund was reduced from 0.50% to
0.35%, effective February 4, 2000. The expense information above has been
restated to reflect this change in the Fund's management fee.
* Each of these Fund's total annual operating expenses for the most recent
fiscal year were less than the amount shown because of a fee waiver or
reimbursement of expenses by the Funds' Investment Manager. The Investment
Manager waives a portion of its management fee and/or reimburses expenses in
order to keep each Fund's total operating expenses at or below a specified
level. The Investment Manager may eliminate all or part of the fee waiver or
reimbursement at any time. With the fee waiver and reimbursement, the Funds'
actual total annual fund operating expenses for the year ended December 31,
1999, were as follows: Diversified Income Fund - 0.87%, High Yield Fund -
0.72%, Municipal Bond Fund - 1.01%.
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
CLASS B
--------------------------------------------------
DISTRIBUTION TOTAL ANNUAL
MANAGEMENT (12b-1) OTHER FUND OPERATING
FEES FEES(4) EXPENSES EXPENSES
Diversified Income Fund ...... 0.35%(5) 1.00% 0.86% 2.21%*
High Yield Fund .............. 0.60% 1.00% 0.53% 2.13%*
Municipal Bond Fund .......... 0.50% 1.00% 0.69% 2.19%*
--------------------------------------------------------------------------------
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by the National Association of Securities Dealers, Inc.
Rules.
5 The management fee for Diversified Income Fund was reduced from 0.50% to
0.35%, effective February 4, 2000. The expense information above has been
restated to reflect this change in the Fund's management fee.
* Each of these Fund's total annual operating expenses for the most recent
fiscal year were less than the amount shown because of a fee waiver or
reimbursement of expenses by the Funds' Investment Manager. The Investment
Manager waives a portion of its management fee and/or reimburses expenses in
order to keep each Fund's total operating expenses at or below a specified
level. The Investment Manager may eliminate all or part of the fee waiver or
reimbursement at any time. With the fee waiver and reimbursement, the Funds'
actual total annual fund operating expenses for the year ended December 31,
1999, were as follows: Diversified Income Fund - 1.85%, High Yield Fund -
1.53%, Municipal Bond Fund - 1.76%.
--------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
--------------------------------------------------------------------------------
CLASS C
--------------------------------------------------
DISTRIBUTION TOTAL ANNUAL
MANAGEMENT (12b-1) OTHER FUND OPERATING
FEES FEES(4) EXPENSES EXPENSES
Diversified Income Fund(6).... 0.35%(5) 1.00% 0.62% 1.97%*
High Yield Fund(6)............ 0.60% 1.00% 0.47% 2.07%*
--------------------------------------------------------------------------------
4 Long-term holders of shares that are subject to an asset-based sales charge
may pay more than the equivalent of the maximum front-end sales charge
otherwise permitted by the National Association of Securities Dealers, Inc.
Rules.
5 The management fee for Diversified Income Fund was reduced from 0.50% to
0.35%, effective February 4, 2000. The expense information above has been
restated to reflect this change in the Fund's management fee.
6 The amounts shown for C shares are estimated amounts, as C shares were not in
existence at December 31, 1999.
* Each of these Fund's total annual operating expenses for the most recent
fiscal year were less than the amount shown because of a fee waiver or
reimbursement of expenses by the Funds' Investment Manager. The Investment
Manager waives a portion of its management fee and/or reimburses expenses in
order to keep each Fund's total operating expenses at or below a specified
level. The Investment Manager may eliminate all or part of the fee waiver or
reimbursement at any time. With the fee waiver and reimbursement, the Funds'
actual total annual fund operating expenses for the year ended December 31,
1999, were as follows: Diversified Income Fund - 1.85%, High Yield Fund -
1.47.
--------------------------------------------------------------------------------
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.
Each Example assumes that you invest $10,000 in a Fund for the time periods
indicated. Each Example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be as follows:
You would pay the following expenses if you redeemed your shares at the end
of each period.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------- --------------------- --------------------- ---------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B C A B C A B C A B C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Income Fund .. $593 $724 $300 $844 $991 $618 $1,113 $1,385 $1,062 $1,882 $2,294 $2,296
High Yield Fund .......... 603 716 310 873 967 649 1,164 1,344 1,114 1,990 2,256 2,400
Municipal Bond Fund ...... 586 722 --- 820 985 --- 1,073 1,375 --- 1,795 2,257 ---
Cash Fund ................ 88 --- --- 274 --- --- 477 --- --- 1,061 --- ---
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
You would pay the following expenses if you did not redeem your shares.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------- --------------------- --------------------- ---------------------
CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
A B C A B C A B C A B C
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Income Fund .. $593 $224 $200 $844 $691 $618 $1,113 $1,185 $1,062 $1,882 $2,294 $2,296
High Yield Fund .......... 603 216 210 873 667 649 1,164 1,144 1,114 1,990 2,256 2,400
Municipal Bond Fund ...... 586 222 --- 820 685 --- 1,073 1,175 --- 1,795 2,257 ---
Cash Fund ................ 88 --- --- 274 --- --- 477 --- --- 1,061 --- ---
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
INVESTMENT MANAGER
Security Management Company, LLC (the "Investment Manager"), 700 SW Harrison
Street, Topeka, Kansas 66636-0001, is the Funds' Investment Manager. On December
31, 1999, the aggregate assets of all of the mutual funds under the investment
management of the Investment Manager were approximately $6.3 billion.
The Investment Manager has engaged Salomon Brothers Asset Management Inc, 7
World Trade Center, New York, New York 10048, to provide investment advisory
services to Municipal Bond Fund. Salomon Brothers was incorporated in 1987 and
currently manages, together with its affiliates, approximately $29 billion in
assets.
The Investment Manager and the Funds have received from the Securities and
Exchange Commission an exemptive order for a multi-manager structure that allows
the Investment Manager to hire, replace or terminate sub-advisers without the
approval of shareholders. The order also allows the Investment Manager to revise
a sub-advisory agreement with the approval of Fund Directors, but without
shareholder approval. If a new sub-adviser is hired, shareholders will receive
information about the new sub-adviser within 90 days of the change. The order
allows the Funds to operate more efficiently and with greater flexibility. The
Investment Manager provides the following oversight and evaluation services to a
Fund which uses a sub-adviser:
* performing initial due diligence on prospective sub-advisers
* monitoring the performance of the sub-adviser
* communicating performance expectations to the sub-adviser
* ultimately recommending to the Board of Directors whether a sub-adviser's
contract should be renewed, modified or terminated.
The Investment Manager does not expect to recommend frequent changes of
sub-advisers. Although the Investment Manager will monitor the performance of
sub-advisers, there is no certainty that any sub-adviser or Fund will obtain
favorable results at any given time.
MANAGEMENT FEES -- The following chart shows the investment management fees paid
by each Fund during the last fiscal year.
-------------------------------------------------
MANAGEMENT FEES
(expressed as a percentage of average net assets)
-------------------------------------------------
Diversified Income Fund................... 0.00%
High Yield Fund........................... 0.00%
Municipal Bond Fund....................... 0.50%
Cash Fund................................. 0.50%
-------------------------------------------------
PORTFOLIO MANAGERS -- ROBERT AMODEO, a Portfolio Manager at Salomon Brothers,
has managed the Municipal Bond Fund's portfolio since September 1998. Prior to
joining Salomon Brothers Asset Management in 1992, Mr. Amodeo was a member of
Salomon Brothers, Inc. Partnership Investment Group where he was responsible for
analyzing and managing various partnership investments. Mr. Amodeo pioneered
adaptation and the use of the Yield Book for municipal bond portfolio
management, analysis, performance attribution and optimization. He received a
B.S. in Business Management from Long Island University and he is a Chartered
Financial Analyst.
STEVE BOWSER, Vice President and Portfolio Manager of the Investment Manager,
has managed the Diversified Income Fund's portfolio since 1995. Mr. Bowser
joined the Investment Manager in 1992. Prior to joining the Investment Manager,
he was Assistant Vice President and Portfolio Manager with the Federal Home Loan
Bank of Topeka from 1989 to 1992. He was employed at the Federal Reserve Bank of
Kansas City in 1988 and began his career with the Farm Credit System from 1982
to 1987, serving as a Senior Financial Analyst and Assistant Controller. He
graduated with a bachelor of science degree from Kansas State University in
1982. He is a Chartered Financial Analyst.
CHRIS PHALEN, Research Analyst of the Investment Manager, has co-managed
Diversified Income Fund since May 2000. Prior to joining the Investment Manager
in 1997, he was with Sprint PCS as a pricing analyst. Prior to joining Sprint
PCS in 1997, Mr. Phalen was employed by Security Benefit Group. Mr. Phalen
graduated from the University of Kansas with a bachelor of business
administration and accounting degree.
DAVID G. TOUSSAINT, Portfolio Manager of the Investment Manager, has managed
High Yield Fund since April 2000. Mr. Toussaint has nine years of investment
experience and holds a CPA certificate. Prior to joining the Investment Manager
in 2000, he was with Allstate Insurance Company as an investment analyst and in
various managerial positions in their investment operations group. Mr. Toussaint
earned a bachelor of arts degree in Economics from the University of Illinois, a
master of science degree in Accountancy from DePaul University and an M.B.A.
from the University of Chicago. He is a Chartered Financial Analyst.
BUYING SHARES
Shares of the Funds are available through broker/dealers, banks, and other
financial intermediaries that have an agreement with the Funds' Distributor,
Security Distributors, Inc.
There are two different ways to buy shares of Municipal Bond Fund--Class A
shares or Class B shares. There are three different ways to buy shares of
Diversified Income Fund and High Yield Fund--Class A shares, Class B shares or
Class C shares. Cash Fund offers a single class of shares which is offered at
net asset value next determined after an order is accepted. The different
classes of a Fund differ primarily with respect to sales charges and Rule 12b-1
distribution fees to which they are subject. Shares of Cash Fund are offered by
the Fund without a sales charge. The minimum initial investment is $100.
Subsequent investments must be $100 (or $20 under an Accumulation Plan). The
Funds and the Distributor reserve the right to reject any order to purchase
shares.
CLASS A SHARES -- Class A shares are subject to a sales charge at the time of
purchase. An order for Class A shares will be priced at a Fund's net asset value
per share (NAV), plus the sales charge set forth below. The NAV plus the sales
charge is the "offering price." A Fund's NAV is generally calculated as of the
close of trading on every day the New York Stock Exchange is open. An order for
Class A shares is priced at the NAV next calculated after the order is accepted
by the Fund, plus the sales charge.
--------------------------------------------------------------------------------
SALES CHARGE
----------------------------------------------
AS A PERCENTAGE AS A PERCENTAGE OF
AMOUNT OF ORDER OF OFFERING PRICE NET AMOUNT INVESTED
--------------------------------------------------------------------------------
Less than $50,000 ............... 4.75% 4.99%
$50,000 to $99,999 .............. 3.75% 3.90%
$100,000 to $249,999 ............ 2.75% 2.83%
$250,000 to $999,999 ............ 1.75% 1.78%
$1,000,000 or more* ............. None None
--------------------------------------------------------------------------------
*Purchases of $1,000,000 or more are not subject to a sales charge at the time
of purchase, but are subject to a deferred sales charge of 1.00% if redeemed
within one year following purchase. The deferred sales charge is a percentage
of the lesser of the NAV of the shares redeemed or the net cost of such shares.
Shares that are not subject to a deferred sales charge are redeemed first.
--------------------------------------------------------------------------------
Please see Appendix C for options that are available for reducing the sales
charge applicable to purchases of Class A shares.
CLASS A DISTRIBUTION PLAN -- The Funds (except Cash Fund) have adopted Class A
Distribution Plans that allow each of these Funds to pay distribution fees to
the Funds' Distributor. The Distributor uses the fees to pay for activities
related to the sale of Class A shares and services provided to shareholders. The
distribution fee is equal to 0.25% of the average daily net assets of the Fund's
Class A shares. Because the distribution fees are paid out of the Fund's assets
on an ongoing basis, over time these fees will increase the cost of a
shareholder's investment and may cost an investor more than paying other types
of sales charges.
CLASS B SHARES -- Class B shares are not subject to a sales charge at the time
of purchase. An order for Class B shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. A Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class B shares are subject to a deferred sales charge if withdrawn within 5
years from the date of purchase. The deferred sales charge is a percentage of
the NAV of the shares at the time they are redeemed or the original purchase
price, whichever is less. Shares that are not subject to the deferred sales
charge are redeemed first. Then, shares held the longest will be the first to be
redeemed.
The amount of the deferred sales charge is based upon the number of years since
the shares were purchased, as follows:
-------------------------------------
NUMBER OF YEARS DEFERRED
SINCE PURCHASE SALES CHARGE
-------------------------------------
1 5%
2 4%
3 3%
4 3%
5 2%
6 and more 0%
-------------------------------------
The Distributor will waive the deferred sales charge under certain
circumstances. See "Waiver of Deferred Sales Charge," page 15.
CLASS B DISTRIBUTION PLAN -- The Funds (except Cash Fund) have adopted Class B
Distribution Plans that allow each of the Funds to pay distribution fees to the
Distributor. The Distributor uses the fees to finance activities related to the
sale of Class B shares and services to shareholders. The distribution fee is
equal to 1.00% of the average daily net assets of the Fund's Class B shares.
Because the distribution fees are paid out of the Fund's assets on an ongoing
basis, over time these fees will increase the cost of a shareholder's investment
and may cost an investor more than paying other types of sales charges.
Class B shares automatically convert to Class A shares on the eighth anniversary
of purchase. This is advantageous because Class A shares are subject to a lower
distribution fee than Class B shares. A pro rata amount of Class B shares
purchased through the reinvestment of dividends or other distributions is also
converted to Class A shares each time that shares purchased directly are
converted.
CLASS C SHARES -- Class C shares are not subject to a sales charge at the time
of purchase. An order for Class C shares will be priced at a Fund's NAV next
calculated after the order is accepted by the Fund. A Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class C shares are subject to a deferred sales charge of 1.00% if redeemed
within one year from the date of purchase. The deferred sales charge is a
percentage of the NAV of the shares at the time they are redeemed or the
original purchase price, whichever is less. Shares that are not subject to the
deferred sales charge are redeemed first. Then, shares held the longest will be
the first to be redeemed. The Distributor will waive the deferred sales charge
under certain circumstances. See "Waiver of Deferred Sales Charge," page 15.
CLASS C DISTRIBUTION PLAN -- The Diversified Income Fund and High Yield Fund
have adopted Class C Distribution Plans that allow each of the Funds to pay
distribution fees to the Distributor. The Distributor uses the fees to finance
activities related to the sale of Class C shares and services to shareholders.
The distribution fee is equal to 1.00% of the average daily net assets of the
Fund's Class C shares. Because the distribution fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of a
shareholder's investment and may cost an investor more than paying other types
of sales charges.
CASH FUND -- Shares of Cash Fund are offered at NAV next calculated after an
order is accepted. There is no sales charge or load. The minimum initial
investment in Cash Fund is $100 for each account. Subsequent investments may be
made in any amount of $20 or more. Cash Fund purchases may be made in any of the
following ways:
1. BY MAIL
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601
(b) Make check or draft payable to "SECURITY CASH FUND."
(c) For initial investment include a completed investment application found
on page 34 of this prospectus.
2. BY WIRE
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) For an initial investment, you must also send a completed investment
application to the Fund.
3. THROUGH BROKER/DEALERS
Investors may, if they wish, invest in Cash Fund by purchasing shares through
registered broker/dealers. Broker/dealers who process orders on behalf of their
customers may charge a fee for their services. Investments made directly without
the assistance of a broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. The Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
WAIVER OF DEFERRED SALES CHARGE -- The Distributor will waive the deferred sales
charge under the following circumstances:
* Upon the death of the shareholder if shares are redeemed within one year of
the shareholder's death
* Upon the disability of the shareholder prior to age 65 if shares are redeemed
within one year of the shareholder becoming disabled and the shareholder was
not disabled when the shares were purchased
* In connection with required minimum distributions from a retirement plan
qualified under Section 401(a), 401(k), 403(b) or 408 of the Internal Revenue
Code
* In connection with distributions from retirement plans qualified under
Section 401(a), 401(k) or 403(b) of the Internal Revenue Code for:
> returns of excess contributions to the plan
> retirement of a participant in the plan
> a loan from the plan (loan repayments are treated as new sales for
purposes of the deferred sales charge)
> financial hardship (as defined in regulations under the Code) of a
participant in a plan
> termination of employment of a participant in a plan
> any other permissible withdrawal under the terms of the plan.
CONFIRMATIONS AND STATEMENTS -- The Funds will send you a confirmation statement
after every transaction that affects your account balance or registration.
However, certain automatic transactions may be confirmed on a quarterly basis
including systematic withdrawals, automatic purchases and reinvested dividends.
Each shareholder will receive a quarterly statement setting forth a summary of
the transactions that occurred during the preceding quarter.
SELLING SHARES
Selling your shares of a Fund is called a "redemption," because the Fund buys
back its shares. A shareholder may sell shares at any time. Shares will be
redeemed at the NAV next determined after the order is accepted by the Fund's
transfer agent, less any applicable deferred sales charge. A Fund's NAV is
generally calculated as of the close of trading on every day the New York Stock
Exchange is open. Any share certificates representing Fund shares being sold
must be returned with a request to sell the shares.
When redeeming recently purchased shares, the Fund may delay sending the
redemption proceeds until it has collected payment, which may take up to 15
days from date of purchase.
BY MAIL -- To sell shares by mail, send a letter of instruction that includes:
* The name and signature of the account owner(s)
* The name of the Fund
* The dollar amount or number of shares to sell
* Where to send the proceeds
* A signature guarantee if
> The check will be mailed to a payee or address different than that of the
account owner, or
> The sale of shares is more than $10,000.
--------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect against fraud. Banks, brokers, credit
unions, national securities exchanges and savings associations provide signature
guarantees. A notary public is not an eligible signature guarantor. For joint
accounts, both signatures must be guaranteed.
--------------------------------------------------------------------------------
Mail your request to:
Security Management Company, LLC
P.O. Box 750525
Topeka, KS 66675-9135
Signature requirements vary based on the type of account you have:
* INDIVIDUAL OR JOINT TENANTS: Written instructions must be signed by an
individual shareholder, or in the case of joint accounts, all of the
shareholders, exactly as the name(s) appears on the account.
* UGMA OR UTMA: Written instructions must be signed by the custodian as it
appears on the account.
* SOLE PROPRIETOR OR GENERAL PARTNER: Written instructions must be signed by an
authorized individual as it appears on the account.
* CORPORATION OR ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A certified resolution dated
within six months of the date of receipt, authorizing the signer to act, must
accompany the request if not on file with the Funds.
* TRUST: Written instructions must be signed by the trustee(s). If the name of
the current trustee(s) does not appear on the account, a certified
certificate of incumbency dated within 60 days must also be submitted.
* RETIREMENT: Written instructions must be signed by the account owner.
BY TELEPHONE -- If you selected this option on your account application, you may
make redemptions from your account by calling 1-800-888-2461, extension 3127, on
weekdays (except holidays) between 7:00 a.m. and 6:00 p.m. Central time. The
Funds require that requests for redemptions over $10,000 be in writing with
signatures guaranteed. You may not close your account by telephone or redeem
shares for which a certificate has been issued. If you would like to establish
this option on an existing account, please call 1-800-888-2461, extension 3127.
Shareholders may not redeem shares held in an IRA or 403(b)(7) account by
telephone.
BY BROKER -- You may redeem your shares through your broker. Brokers may charge
a commission upon the redemption of shares.
The Funds may suspend the right of redemption during any period when trading on
the New York Stock Exchange is restricted or such Exchange is closed for other
than weekends or holidays, or any emergency is deemed to exist by the Securities
and Exchange Commission.
CASH FUND -- If checks are requested on the Checking Privilege Request Form, you
may redeem shares of Cash Fund by check. Such checks must be in an amount of
$100 or more. Redemption by check is not available for any shares held in
certificate form or for shares recently purchased for which the Fund has not
collected payment. Check writing privileges may encourage multiple redemptions
on an account.
PAYMENT OF REDEMPTION PROCEEDS -- Payments may be made by check.
The Funds may suspend the right of redemption during any period when trading on
the New York Stock Exchange is restricted or such Exchange is closed for other
than weekends or holidays, or any emergency is deemed to exist by the Securities
and Exchange Commission.
BY CHECK. Redemption proceeds will be sent to the shareholder(s) of record at
the address on our records within seven days after receipt of a valid redemption
request. For a charge of $15 deducted from redemption proceeds, the Investment
Manager will provide a certified or cashier's check, or send the redemption
proceeds by express mail, upon the shareholder's request.
DIVIDENDS AND TAXES
Each Fund (except Cash Fund) pays its shareholders dividends from its net
investment income monthly, and distributes any net capital gains that it has
realized, at least annually. Cash Fund pays its shareholders dividends from its
investment income daily. Your dividends and distributions will be reinvested in
shares of the Fund, unless you instruct the Investment Manager otherwise. There
are no fees or sales charges on reinvestments.
TAX ON DISTRIBUTIONS -- Fund dividends and distributions are taxable to
shareholders (unless your investment is in an Individual Retirement Account
("IRA") or other tax-advantaged retirement account) whether you reinvest your
dividends or distributions or take them in cash.
In addition to federal tax, dividends and distributions may be subject to state
and local taxes. If a Fund declares a dividend or distribution in October,
November or December but pays it in January, you may be taxed on that dividend
or distribution as if you received it in the previous year. In general,
dividends and distributions from the Funds are taxable as follows:
--------------------------------------------------------------------------------
TYPE OF TAX RATE FOR TAX RATE FOR 28%
DISTRIBUTION 15% BRACKET BRACKET OR ABOVE
--------------------------------------------------------------------------------
Income dividends Ordinary Income rate Ordinary Income rate
Short-term capital gains Ordinary Income rate Ordinary Income rate
Long-term capital gains 10% 20%
--------------------------------------------------------------------------------
A Fund has "short-term capital gains" when it sells a security within 12 months
after buying it. A Fund has "long-term capital gains" when it sells a security
that it has owned for more than 12 months. When a Fund earns interest from bonds
and other debt securities and distributes these earnings to shareholders, the
Fund has "ordinary income." The Funds (other than Municipal Bond Fund) expect
that their distributions will consist primarily of ordinary income.
The Municipal Bond Fund may make distributions called "exempt-interest
dividends" that are exempt from federal income tax. Exempt-interest dividends
will not necessarily be exempt from state and local income taxes. The Municipal
Bond Fund may also make taxable distributions (including capital gains
distributions). You generally are required to report all Fund distributions,
including exempt-interest dividends, on your federal income tax return.
Tax-deferred retirement accounts do not generate a tax liability unless you are
taking a distribution or making a withdrawal.
The Fund will mail you information concerning the tax status of the
distributions for each calendar year on or before January 31 of the following
year.
TAXES ON SALES OR EXCHANGES -- You may be taxed on any sale or exchange of Fund
shares. The amount of gain or loss will depend primarily upon how much you pay
for the shares, how much you sell them for, and how long you hold them.
The table above can provide a guide for your potential tax liability when
selling or exchanging Fund shares. "Short-term capital gains" applies to Fund
shares sold or exchanged up to one year after buying them. "Long-term capital
gains" applies to shares held for more than one year.
BACKUP WITHHOLDING -- As with all mutual funds, a Fund may be required to
withhold U.S. federal income tax at the rate of 31% of all taxable distributions
payable to you if you fail to provide the Fund with your correct taxpayer
identification number or to make required certifications, or if you have been
notified by the Internal Revenue Service that you are subject to backup
withholding. Backup withholding is not an additional tax; rather, it is a way in
which the Internal Revenue Service ensures it will collect taxes otherwise due.
Any amounts withheld may be credited against your U.S. federal income tax
liability.
You should consult your tax professional about federal, state and local tax
consequences to you of an investment in the Fund. Please see the Statement of
Additional Information for additional tax information.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (NAV) of each Fund is computed as of the close of
regular trading hours on the New York Stock Exchange (normally 3 p.m. Central
time) on days when the Exchange is open. The Exchange is open Monday through
Friday, except on observation of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Each Fund's NAV is generally based upon the market value of securities held in
the Fund's portfolio. If market prices are not available, the fair value of
securities is determined using procedures approved by each Fund's Board of
Directors.
SHAREHOLDER SERVICES
ACCUMULATION PLAN -- An investor may choose to invest in one of the Funds
(except Cash Fund) through a voluntary Accumulation Plan. This allows for an
initial investment of $100 minimum and subsequent investments of $20 minimum at
any time. An Accumulation Plan involves no obligation to make periodic
investments, and is terminable at will.
Payments are made by sending a check to the Distributor who (acting as an agent
for the dealer) will purchase whole and fractional shares of the Fund as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make Fund
purchases. There is no additional charge for choosing to use Secur-O-Matic.
Withdrawals from your bank account may occur up to 3 business days before the
date scheduled to purchase Fund shares. An application for Secur-O-Matic may be
obtained from the Funds.
SYSTEMATIC WITHDRAWAL PROGRAM -- Shareholders who wish to receive regular
monthly, quarterly, semiannual, or annual payments of $25 or more may establish
a Systematic Withdrawal Program. A shareholder may elect a payment that is a
specified percentage of the initial or current account value or a specified
dollar amount. A Systematic Withdrawal Program will be allowed only if shares
with a current aggregate net asset value of $5,000 or more are deposited with
the Investment Manager, which will act as agent for the stockholder under the
Program. Shares are liquidated at net asset value. The Program may be terminated
on written notice, or it will terminate automatically if all shares are
liquidated or withdrawn from the account.
A shareholder may establish a Systematic Withdrawal Program with respect to
Class B and Class C shares without the imposition of any applicable contingent
deferred sales charge, provided that such withdrawals do not in any 12-month
period, beginning on the date the Program is established, exceed 10% of the
value of the account on that date ("Free Systematic Withdrawals"). Free
Systematic Withdrawals are not available if a Program established with respect
to Class B or Class C shares provides for withdrawals in excess of 10% of the
value of the account in any Program year and, as a result, all withdrawals under
such a Program would be subject to any applicable contingent deferred sales
charge. Free Systematic Withdrawals will be made first by redeeming those shares
that are not subject to the contingent deferred sales charge and then by
redeeming shares held the longest. The contingent deferred sales charge
applicable to a redemption of Class B or Class C shares requested while Free
Systematic Withdrawals are being made will be calculated as described under
"Class B Shares" and "Class C Shares," as applicable. A Systematic Withdrawal
form may be obtained from the Funds.
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Funds may exchange
those shares for shares of Diversified Income Fund or High Yield Fund, or for
shares of the other mutual funds distributed by the Distributor, which currently
include Security Growth and Income, Equity, Global, Total Return, Social
Awareness, Mid Cap Value, Small Cap Growth, Enhanced Index, International,
Select 25, Large Cap Growth, Technology and Ultra Funds. Shareholders who hold
their shares in a tax-qualified retirement plan may also exchange shares of the
Funds for shares of Capital Preservation Fund, but may not exchange shares of
the Funds for shares of Municipal Bond Fund. Shareholders, except those who have
purchased through the following custodial accounts of the Investment Manager,
403(b)(7) accounts, SEPP accounts and SIMPLE Plans, may also exchange their
shares for shares of Cash Fund.
Exchanges may be made only in those states where shares of the fund into which
an exchange is to be made are qualified for sale. No service fee or sales charge
is presently imposed on such an exchange. Shares of a particular class of the
Funds may be exchanged only for shares of the same class of another fund
distributed by the Distributor or for shares of Cash Fund, if available, which
offers a single class of shares. Any applicable contingent deferred sales charge
will be imposed upon redemption and calculated from the date of the initial
purchase without regard to the time shares were held in Cash Fund.
For tax purposes, an exchange is a sale of shares which may result in a taxable
gain or loss. Special rules may apply to determine the amount of gain or loss on
an exchange occurring within ninety days after purchase of the exchanged shares.
Exchanges of Class A shares from Diversified Income, High Yield and Municipal
Bond Funds are made at net asset value without a front-end sales charge if (1)
the shares have been owned for at least 90 consecutive days prior to the
exchange, (2) the shares were acquired pursuant to a prior exchange from a
Security Fund which assessed a sales charge on the original purchase, or (3) the
shares were acquired as a result of the reinvestment of dividends or capital
gains distributions. Exchanges of Class A shares from Diversified Income, High
Yield and Municipal Bond Funds, other than those described above, are made at
net asset value plus the sales charge described in the prospectus of the other
Security Fund being acquired, less the sales charge paid on the shares of these
Funds at the time of original purchase.
Because Cash Fund does not impose a sales charge or commission in connection
with sales of its shares, any exchange of Cash Fund shares acquired through
direct purchase or reinvestment of dividends will be based on the respective net
asset values of the shares involved and a sales charge will be imposed equal to
the sales charge that would be charged such shareholder if he or she were
purchasing for cash.
Shareholders should contact the Fund before requesting an exchange in order to
ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Investment Manager
will first cause to be exchanged those shares which would not be subject to any
sales charges. The terms of an employee-sponsored retirement plan may affect a
shareholder's right to exchange shares as described above. Contact your plan
sponsor or administrator to determine if all of the exchange options discussed
above are available under your plan.
Exchanges are made upon receipt of a properly completed Exchange Authorization
form. A current prospectus of the fund into which an exchange is made will be
given to each stockholder exercising this privilege.
To exchange shares by telephone, a shareholder must hold shares in
non-certificate form and must either have completed the Telephone Exchange
section of the application or a Telephone Transfer Authorization form which may
be obtained from the Investment Manager. Once authorization has been received by
the Investment Manager, a shareholder may exchange shares by telephone by
calling the Funds at (800) 888-2461, extension 3127, on weekdays (except
holidays) between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange
requests received by telephone after the close of the New York Stock Exchange
(normally 3 p.m. Central time) will be treated as if received on the next
business day. The exchange privilege, including telephone exchanges, may be
changed or discontinued at any time by either the Investment Manager or the
Funds upon 60 days' notice to shareholders.
DOLLAR COST AVERAGING. Only for shareholders of a 403(b)(7) account sponsored by
the Investment Manager and opened on or after June 5, 2000, a special exchange
privilege is available. This privilege allows such shareholders to make periodic
exchanges of shares from the Security Capital Preservation Fund (held in
non-certificate form) to one or more of the funds available under the exchange
privilege as described above. Such periodic exchanges in which securities are
purchased at regular intervals are known as "dollar cost averaging." With dollar
cost averaging, the cost of the securities gets averaged over time and possibly
over various market cycles. Dollar cost averaging does not guarantee profits,
nor does it assure that you will not have losses.
You may obtain a dollar cost averaging request form from the Investment Manager.
You must designate on the form whether amounts are to be exchanged on the basis
of a specific dollar amount or a specific number of shares. The Investment
Manager will exchange shares as requested on the first business day of the
month. The Investment Manager will make exchanges until your account value in
the Security Capital Preservation Fund is depleted or until you instruct the
Investment Manager to terminate dollar cost averaging. You may instruct the
Investment Manager to terminate dollar cost averaging at any time by written
request.
ASSET REBALANCING. Only for shareholders of a 403(b)(7) account sponsored by the
Investment Manager and opened on or after June 5, 2000, a special exchange
privilege is available that allows shareholders to automatically exchange shares
of the funds on a quarterly basis to maintain a particular percentage allocation
among the funds. The available funds are those discussed above under the
exchange privilege and shares of such funds must be held in non-certificate
form. Your account value allocated to a fund will grow or decline in value at
different rates during the selected period, and asset rebalancing will
automatically reallocate your account value in the funds to the allocation you
select on a quarterly basis.
You may obtain an asset rebalancing request form from the Investment Manager.
You must designate on the form the applicable funds and the percentage of
account value to be maintained in each fund. Thereafter, the Investment Manager
will exchange shares of the funds to maintain that allocation on the first
business day of each calendar quarter. You may instruct the Investment Manager
to terminate asset rebalancing at any time by written request.
RETIREMENT PLANS -- The Funds have available tax-qualified retirement plans for
individuals, prototype plans for the self-employed, pension and profit sharing
plans for corporations and custodial accounts for employees of public school
systems and organizations meeting the requirements of Section 501(c)(3) of the
Internal Revenue Code. Further information concerning these plans is contained
in the Funds' Statement of Additional Information.
GENERAL INFORMATION
SHAREHOLDER INQUIRIES -- Shareholders who have questions concerning their
account or wish to obtain additional information may write to the Funds (see
back cover for address and telephone numbers), or contact their securities
dealer.
INVESTMENT POLICIES AND MANAGEMENT PRACTICES
This section takes a detailed look at some of the types of securities the Funds
may hold in their portfolios and the various kinds of management practices that
may be used in the portfolios. The Funds' holdings of certain types of
investments cannot exceed a maximum percentage of net assets. These percentage
limitations are set forth in the Statement of Additional Information. While the
percentage limitations provide a useful level of detail about a Fund's
investment program, they should not be viewed as an accurate gauge of the
potential risk of the investment. For example, in a given period, a 5%
investment in futures contracts could have significantly more of an impact on a
Fund's share price than its weighting in the portfolio. The net effect of a
particular investment depends on its volatility and the size of its overall
return in relation to the performance of all of the Fund's other investments.
Fund Portfolio Managers have considerable leeway in choosing investment
strategies and selecting securities they believe will help a Fund achieve its
objective. In seeking to meet its investment objective, a Fund may invest in any
type of security or instrument whose investment characteristics are consistent
with the Fund's investment program.
The Funds are subject to certain investment policy limitations referred to as
"fundamental policies." The fundamental policies cannot be changed without
shareholder approval. Some of the more important fundamental policies are that
each Fund will not:
* invest more than 5% of its total assets in the securities of any one issuer
(other than obligations of, or guaranteed by, the U.S. Government, its
agencies or instrumentalities); provided, that this limitation applies only
with respect to 75% of the value of the Fund's total assets
* purchase a security if, as a result, with respect to 75% of the value of the
Fund's total assets, more than 10% of the outstanding voting securities of
any one issuer would be held by the Fund (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities)
* invest 25% or more of its total assets in any one industry.
The Municipal Bond Fund will not invest more than 20% of its assets in
securities that are not tax-exempt securities, except when in a temporary
defensive position. The full text of each Fund's fundamental policies is
included in the Statement of Additional Information.
The following pages describe some of the investments which may be made by the
Funds, as well as some of the management practices of the Funds.
CONVERTIBLE SECURITIES -- Diversified Income Fund and High Yield Fund may invest
in debt or preferred equity securities convertible into, or exchangeable for,
equity securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree.
FOREIGN SECURITIES -- Diversified Income Fund and High Yield Fund may invest in
foreign securities denominated in U.S. dollars. Foreign investments increase a
Fund's diversification and may enhance return, but they also involve some
special risks, such as exposure to potentially adverse local political and
economic developments; nationalization and exchange controls; potentially lower
liquidity and higher volatility; and possible problems arising from accounting,
disclosure, settlement and regulatory practices that differ from U.S. standards.
These risks are heightened for investments in developing countries.
ASSET-BACKED SECURITIES -- Diversified Income Fund and High Yield Fund may
invest in asset-backed securities. An underlying pool of assets, such as credit
card receivables, automobile loans, or corporate loans or bonds backs these
bonds and provides the interest and principal payments to investors. On
occasion, the pool of assets may also include a swap obligation, which is used
to change the cash flows on the underlying assets. As an example, a swap may be
used to allow floating rate assets to back a fixed rate obligation. Credit
quality depends primarily on the quality of the underlying assets, the level of
credit support, if any, provided by the issuer, and the credit quality of the
swap counterparty, if any. The underlying assets (I.E., loans) are subject to
prepayments, which can shorten the securities' weighted average life and may
lower their return. The value of these securities also may change because of
actual or perceived changes in the creditworthiness of the originator, the
servicing agent, the financial institution providing credit support, or swap
counterparty.
MORTGAGE-BACKED SECURITIES -- Diversified Income Fund and High Yield Fund may
invest in a variety of mortgage-backed securities. Mortgage lenders pool
individual home mortgages with similar characteristics to back a certificate or
bond, which is sold to investors such as the Funds. Interest and principal
payments generated by the underlying mortgages are passed through to the
investors. The three largest issuers of these securities are the Government
National Mortgage Association (GNMA), the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). GNMA
certificates are backed by the full faith and credit of the U.S. Government,
while others, such as Fannie Mae and Freddie Mac certificates, are only
supported by the ability to borrow from the U.S. Treasury or supported only by
the credit of the agency. Private mortgage bankers and other institutions also
issue mortgage-backed securities. Mortgage-backed securities are subject to
scheduled and unscheduled principal payments as homeowners pay down or prepay
their mortgages. As these payments are received, they must be reinvested when
interest rates may be higher or lower than on the original mortgage security.
Therefore, these securities are not an effective means of locking in long-term
interest rates. In addition, when interest rates fall, the pace of mortgage
prepayments picks up. These refinanced mortgages are paid off at face value
(par), causing a loss for any investor who may have purchased the security at a
price above par. In such an environment, this risk limits the potential price
appreciation of these securities and can negatively affect the Fund's net asset
value. When rates rise, the prices of mortgage-backed securities can be expected
to decline, although historically these securities have experienced smaller
price declines than comparable quality bonds. In addition, when rates rise and
prepayments slow, the effective duration of mortgage-backed securities extends,
resulting in increased volatility.
Additional mortgage-backed securities in which these Funds may invest include
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) and stripped mortgage securities.
CMOs are debt securities that are fully collateralized by a portfolio of
mortgages or mortgage-backed securities. All interest and principal payments
from the underlying mortgages are passed through to the CMOs in such a way as to
create, in most cases, more definite maturities than is the case with the
underlying mortgages. CMOs may pay fixed or variable rates of interest, and
certain CMOs have priority over others with respect to the receipt of
prepayments. Stripped mortgage securities (a type of potentially high-risk
derivative) are created by separating the interest and principal payments
generated by a pool of mortgage-backed securities or a CMO to create additional
classes of securities. Generally, one class receives only interest payments
(IOs) and another receives principal payments (POs). Unlike with other
mortgage-backed securities and POs, the value of IOs tends to move in the same
direction as interest rates. The fund can use IOs as a hedge against falling
prepayment rates (interest rates are rising) and/or a bear market environment.
POs can be used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely sensitive to
interest rate changes and to the rate of principal prepayments. A rapid or
unexpected increase in prepayments can severely depress the price of IOs, while
a rapid or unexpected decrease in prepayments could have the same effect on POs.
These securities are very volatile in price and may have lower liquidity than
most other mortgage-backed securities. Certain non-stripped CMOs may also
exhibit these qualities, especially those that pay variable rates of interest
that adjust inversely with, and more rapidly than, short-term interest rates. In
addition, if interest rates rise rapidly and prepayment rates slow more than
expected, certain CMOs, in addition to losing value, can exhibit characteristics
of longer-term securities and become more volatile. There is no guarantee a
Fund's investment in CMOs, IOs, or POs will be successful, and a Fund's total
return could be adversely affected as a result.
RESTRICTED SECURITIES -- Diversified Income Fund, High Yield Fund and Cash Fund
may invest in restricted securities that are eligible for resale under Rule 144A
of the Securities Act of 1933. These securities are sold directly to a small
number of investors, usually institutions. Unlike public offerings, restricted
securities are not registered with the SEC. Although restricted securities which
are eligible for resale under Rule 144A may be readily sold to qualified buyers,
there may not always be a market for them and their sale may involve substantial
delays and additional costs. In addition, the Funds, except Cash Fund, may
invest in restricted securities that are not eligible for resale under Rule
144A. Because there is no active market for these types of securities, selling a
security that is not a Rule 144A security may be difficult and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable.
LOWER RATE DEBT SECURITIES -- Diversified Income Fund and High Yield Fund may
invest in higher yielding debt securities in the lower rating (higher risk)
categories of the recognized rating services (commonly referred to as "junk
bonds"). The total return and yield of junk bonds can be expected to fluctuate
more than the total return and yield of higher-quality bonds. Junk bonds (those
rated below BBB or in default) are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Successful investment in lower-medium- and low-quality bonds involves
greater investment risk and is highly dependent on the Investment Manager's
credit analysis. A real or perceived economic downturn or higher interest rates
could cause a decline in high-yield bond prices by lessening the ability of
issuers to make principal and interest payments. These bonds are often thinly
traded and can be more difficult to sell and value accurately than high-quality
bonds. Because objective pricing data may be less available, judgment may play a
greater role in the valuation process. In addition, the entire junk bond market
can experience sudden and sharp price swings due to a variety of factors,
including changes in economic forecasts, stock market activity, large or
sustained sales by major investors, a high-profile default, or just a change in
the market's psychology. This type of volatility is usually associated more with
stocks than bonds, but junk bond investors should be prepared for it.
U.S. GOVERNMENT SECURITIES-- Each Fund may invest in U.S. Government securities.
Some U.S. Government securities, such as Treasury bills and bonds, are supported
by the full faith and credit of the U.S. Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality. U.S. Government securities include
bills, certificates of indebtedness, notes and bonds issued by the Treasury or
by agencies or instrumentalities of the U.S. Government.
GUARANTEED INVESTMENT CONTRACTS ("GICS") -- Cash Fund may invest in GICs. When
investing in GICs, the Fund makes a cash contribution to a deposit fund of an
insurance company's general account. The insurance company then credits
guaranteed interest to the deposit fund on a monthly basis. The GICs provide
that this guaranteed interest will not be less than a certain minimum rate. The
insurance company may assess periodic charges against a GIC for expenses and
service costs allocable to it, and the charges will be deducted from the value
of the deposit fund. Cash Fund may invest only in GICs that have received the
requisite ratings by one or more NRSROs. Because a Fund may not receive the
principal amount of a GIC from the insurance company on 7 days' notice or less,
the GIC is considered an illiquid investment. In determining average portfolio
maturity, GICs will be deemed to have a maturity equal to the period of time
remaining until the next readjustment of the guaranteed interest rate.
Some of the management practices of the Funds include:
CASH RESERVES -- Each Fund may establish and maintain reserves as the Investment
Manager or Sub-Adviser believes is advisable to facilitate the Fund's cash flow
needs (E.G., redemptions, expenses and purchases of portfolio securities) or for
temporary, defensive purposes. Such reserves may include various types of money
market instruments, certificates of deposit, bank demand accounts and repurchase
agreements.
BORROWING -- Each Fund may borrow money from banks as a temporary measure for
emergency purposes, to facilitate redemption requests, or for other purposes
consistent with the Fund's investment objective and program. Such borrowings may
be collateralized with Fund assets. To the extent that a Fund purchases
securities while it has outstanding borrowings, it is using leverage, I.E.,
using borrowed funds for investment. Leveraging will exaggerate the effect on
net asset value of any increase or decrease in the market value of a Fund's
portfolio. Money borrowed for leveraging will be subject to interest costs that
may or may not be recovered by appreciation of the securities purchased; in
certain cases, interest costs may exceed the return received on the securities
purchased. A Fund also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
FUTURES AND OPTIONS -- Diversified Income Fund, High Yield Fund and Municipal
Bond Fund may utilize futures contracts. The Diversified Income Fund and High
Yield Fund may also utilize options on futures, and may purchase call and put
options and write call and put options on a "covered" basis. Futures (a type of
potentially high-risk derivative) are often used to manage or hedge risk because
they enable the investor to buy or sell an asset in the future at an agreed-upon
price. Options (another type of potentially high-risk derivative) give the
investor the right (where the investor purchases the options), or the obligation
(where the investor writes (sells) the options), to buy or sell an asset at a
predetermined price in the future. Futures and options contracts may be bought
or sold for any number of reasons, including: to manage exposure to changes in
interest rates and bond prices; as an efficient means of adjusting overall
exposure to certain markets; in an effort to enhance income; to protect the
value of portfolio securities; and to adjust portfolio duration. The Diversified
Income Fund and High Yield Fund may purchase, sell, or write call and put
options on securities and financial indices. Futures contracts and options may
not always be successful hedges; their prices can be highly volatile. Using them
could lower a Fund's total return, and the potential loss from the use of
futures can exceed the Fund's initial investment in such contracts.
SWAPS, CAPS, FLOORS AND COLLARS -- Diversified Income Fund and High Yield Fund
may enter into interest rate, total return and index swaps. High Yield Fund may
also enter into the purchase or sale of related caps, floors and collars. A Fund
would enter into these transactions primarily to preserve a return or spread on
a particular investment or portion of its portfolio as a technique for managing
the portfolio's duration (I.E., the price sensitivity to changes in interest
rates) or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. To the extent a Fund enters into these
types of transactions, it will be done to hedge and not as a speculative
investment, and the Fund will not sell interest rate caps or floors if it does
not own securities or other instruments providing the income the Fund may be
obligated to pay. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest on a
notional amount of principal. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified index exceeds a predetermined interest rate. The
purchase of an interest rate floor entitles the purchaser to receive payments on
a notional principal amount from the party selling the floor to the extent that
a specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENT CONTRACTS -- Diversified Income
Fund, High Yield Fund and Municipal Bond Fund may purchase and sell securities
on a "when issued," "forward commitment" or "delayed delivery" basis. The price
of these securities is fixed at the time of the commitment to buy, but delivery
and payment can take place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest accrues to the
purchaser. At the time of delivery, the value of the securities may be more or
less than the purchase or sale price. When a Fund purchases securities on this
basis, there is a risk that the securities may not be delivered and that the
Fund may incur a loss.
PORTFOLIO TURNOVER -- Although the Funds will not generally trade for short-term
profits, circumstances may warrant a sale without regard to the length of time a
security was held. A high turnover rate may increase transaction costs and
result in additional taxable gains.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for their Class A shares and Class B shares during the
past five years, or the period since commencement of a Fund. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund assuming reinvestment of all dividends and distributions.
This information has been derived from financial statements that have been
audited by Ernst & Young LLP, whose report, along with the Funds' financial
statements, are included in the annual report, which is available upon request.
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND (CLASS A)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1999(B)(C)(D) 1998(B)(C) 1997(B)(C) 1996(B)(C)(E) 1995(B)(C)(E)
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period....................... $ 4.96 $ 4.81 $ 4.71 $ 4.97 $ 4.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................... 0.26 0.27 0.32 0.31 0.30
Net gain (loss) on securities (realized & unrealized)..... (0.44) 0.16 0.10 (0.26) 0.62
------- ------- ------- ------- -------
Total from investment operations.......................... (0.18) 0.43 0.42 0.05 0.92
LESS DISTRIBUTIONS:
Dividends (from net investment income).................... (0.26) (0.28) (0.32) (0.31) (0.30)
Distributions (from realized gains)....................... --- --- --- --- ---
------- ------- ------- ------- -------
Total distributions....................................... (0.26) (0.28) (0.32) (0.31) (0.30)
------- ------- ------- ------- -------
Net asset value end of period............................. $ 4.52 $ 4.96 $ 4.81 $ 4.71 $ 4.97
======= ======= ======= ======= =======
Total return (a).......................................... (3.6)% 9.1% 9.2% 1.3% 21.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $12,723 $12,644 $7,652 $8,036 $10,080
Ratio of expenses to average net assets................... 0.87% 0.93% 0.60% 0.65% 1.11%
Ratio of net investment income to average net assets...... 5.58% 5.62% 6.10% 6.44% 6.41%
Portfolio turnover rate................................... 65% 78% 39% 75% 81%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED INCOME FUND (CLASS B)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1999(B)(C)(D) 1998(B)(C) 1997(B)(C) 1996(B)(C)(E) 1995(B)(C)(E)
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period....................... $ 4.95 $ 4.80 $ 4.71 $ 4.97 $ 4.35
INCOME FROM INVESTMENT OPERATIONS:
Net investment income..................................... 0.22 0.22 0.26 0.25 0.26
Net gain (loss) on securities (realized & unrealized)..... (0.44) 0.16 0.10 (0.25) 0.63
------- ------- ------- ------- -------
Total from investment operations.......................... (0.22) 0.38 0.36 (0.00) 0.89
LESS DISTRIBUTIONS:
Dividends (from net investment income).................... (0.22) (0.23) (0.27) (0.26) (0.27)
Distributions (from realized gains)....................... --- --- --- --- ---
------- ------- ------- ------- -------
Total distributions....................................... (0.22) (0.23) (0.27) (0.26) (0.27)
------- ------- ------- ------- -------
Net asset value end of period............................. $ 4.51 $ 4.95 $ 4.80 $ 4.71 $ 4.97
======= ======= ======= ======= =======
Total return (a).......................................... (4.6)% 8.0% 7.9% (0.02)% 20.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $2,356 $3,668 $1,091 $ 661 $ 582
Ratio of expenses to average net assets................... 1.85% 1.85% 1.68% 1.86% 1.87%
Ratio of net investment income to average net assets...... 4.55% 4.66% 5.02% 5.23% 5.69%
Portfolio turnover rate................................... 65% 78% 39% 75% 81%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD FUND (CLASS A)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
------------------------------------------------------------
1999(B)(C) 1998(B)(C) 1997(B)(C) 1996(B)(C)(F)
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period...................... $15.05 $15.71 $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... 1.25 1.22 1.25 0.45
Net gain (loss) on securities (realized & unrealized).... (1.32) (0.47) 0.60 0.32
------- ------- ------- ------
Total from investment operations......................... (0.07) 0.75 1.85 0.77
LESS DISTRIBUTIONS:
Dividends (from net investment income)................... (1.18) (1.22) (1.25) (0.45)
Distributions (from realized gains)...................... (0.15) (0.19) (0.21) ---
------- ------- ------- -------
Total distributions...................................... (1.33) (1.41) (1.46) (0.45)
------- ------- ------- -------
Net asset value end of period............................ $13.65 $15.05 $15.71 $15.32
======= ======= ======= =======
Total return (a)......................................... (0.5)% 5.0% 12.6% 5.2%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)..................... $6,328 $5,781 $5,179 $2,780
Ratio of expenses to average net assets.................. 0.72% 0.76% 0.87% 1.54%
Ratio of net investment income to average net assets..... 8.17% 7.96% 8.14% 7.47%
Portfolio turnover rate.................................. 36% 103% 87% 168%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
HIGH YIELD FUND (CLASS B)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1999(B)(C) 1998(B)(C) 1997(B)(C) 1996(B)(C)(F)
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period...................... $15.02 $15.68 $15.32 $15.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................... 1.06 1.10 1.10 0.41
Net gain (loss) on securities (realized & unrealized).... (1.25) (0.47) 0.59 0.32
------- ------- ------- -------
Total from investment operations......................... (0.19) 0.63 1.69 0.73
LESS DISTRIBUTIONS:
Dividends (from net investment income)................... (1.06) (1.10) (1.12) (0.41)
Distributions (from realized gains)...................... (0.15) (0.19) (0.21) ---
------- ------- ------- -------
Total distributions...................................... (1.21) (1.29) (1.33) (0.41)
------- ------- ------- -------
Net asset value end of period............................ $13.62 $15.02 $15.68 $15.32
======= ======= ======= =======
Total return (a)......................................... (1.3)% 4.2% 11.5% 4.9%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)..................... $4,469 $4,236 $4,432 $2,719
Ratio of expenses to average net assets.................. 1.53% 1.53% 1.80% 2.26%
Ratio of net investment income to average net assets..... 7.35% 7.17% 7.21% 6.74%
Portfolio turnover rate.................................. 36% 103% 87% 168%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND (CLASS A)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------
1999(B)(C)(E) 1998(B)(C)(E) 1997(B)(C)(E) 1996(B)(C)(E) 1995(B)(C)(E)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period.................... $10.24 $10.08 $ 9.72 $ 9.94 $ 9.05
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................. 0.42 0.43 0.42 0.45 0.48
Net gain (loss) on securities (realized & unrealized).. (0.76) 0.17 0.36 (0.21) 0.89
------- ------- ------- ------- --------
Total from investment operations....................... (0.34) 0.60 0.78 0.24 1.37
LESS DISTRIBUTIONS:
Dividends (from net investment income)................. (0.42) (0.44) (0.42) (0.46) (0.48)
Distributions (from realized gains).................... --- --- --- --- ---
------- ------- ------- ------- -------
Total distributions.................................... (0.42) (0.44) (0.42) (0.46) (0.48)
------- ------- ------- ------- -------
Net asset value end of period.......................... $ 9.48 $10.24 $10.08 $ 9.72 $ 9.94
======= ======= ======= ======= =======
Total return (a)....................................... (3.5)% 6.1% 8.3% 2.5% 15.5%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................... $17,630 $19,012 $21,953 $23,304 $25,026
Ratio of expenses to average net assets................ 1.01% 0.82% 0.82% 0.78% 0.86%
Ratio of net investment income to average net assets... 4.19% 4.23% 4.29% 4.67% 5.02%
Portfolio turnover rate................................ 108% 94% 48% 54% 103%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND (CLASS B)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
-----------------------------------------------------------------------------
1999(B)(C)(E) 1998(B)(C)(E) 1997(B)(C)(E) 1996(B)(C)(E) 1995(B)(C)(E)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period.................... $10.26 $10.08 $ 9.73 $ 9.95 $ 9.05
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................................. 0.34 0.31 0.29 0.33 0.37
Net gain (loss) on securities (realized & unrealized).. (0.76) 0.17 0.37 (0.21) 0.90
------- ------- ------- ------- -------
Total from investment operations....................... (0.42) 0.48 0.66 0.12 1.27
LESS DISTRIBUTIONS:
Dividends (from net investment income)................. (0.34) (0.30) (0.31) (0.34) (0.37)
Distributions (from realized gains).................... --- --- --- --- ---
------- ------- ------- ------- -------
Total distributions.................................... (0.34) (0.30) (0.31) (0.34) (0.37)
------- ------- ------- ------- --------
Net asset value end of period.......................... $ 9.50 $10.26 $10.08 $ 9.73 $ 9.95
======= ======= ======= ======= =======
Total return (a)....................................... (4.2)% 4.8% 6.9% 1.2% 14.3%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)................... $1,661 $1,367 $2,344 $1,510 $1,190
Ratio of expenses to average net assets................ 1.76% 2.01% 2.00% 2.01% 2.00%
Ratio of net investment income to average net assets... 3.45% 3.04% 3.11% 3.44% 3.90%
Portfolio turnover rate................................ 108% 94% 48% 54% 103%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
CASH FUND
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FISCAL YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1999(C) 1998(C)(E) 1997(C)(E) 1996(B)(C)(E) 1995(B)(C)(E)
------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Net asset value beginning of period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income.................................... 0.04 0.05 0.05 0.05 0.05
Net gain (loss) on securities (realized & unrealized).... --- --- --- --- ---
------- ------- ------- ------- -------
Total from investment operations......................... 0.04 0.05 0.05 0.05 0.05
LESS DISTRIBUTIONS:
Dividends (from net investment income)................... (0.04) (0.05) (0.05) (0.05) (0.05)
Distributions (from realized gains)...................... --- --- --- --- ---
------- ------- ------- ------- -------
Total distributions...................................... (0.04) (0.05) (0.05) (0.05) (0.05)
------- ------- ------- ------- -------
Net asset value end of period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= =======
Total return (a)......................................... 4.4% 4.7% 4.9% 4.6% 5.0%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)...................... $53,137 $61,828 $57,441 $45,331 $38,158
Ratio of expenses to average net assets................... 0.86% 0.89% 0.90% 1.01% 1.00%
Ratio of net investment income to average net assets...... 4.30% 4.60% 4.80% 4.47% 5.00%
Portfolio turnover rate................................... --- --- --- --- ---
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Total return information does not take into account any sales charges paid
at the time of purchase or contingent deferred sales charges paid at time of
redemption.
(b) Fund expenses were reduced by reimbursement from the Investment Manager.
Expense ratios absent such reimbursements would have been as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Income 1.37% 2.36% 1.43% 3.03% 1.06% 2.14% 1.17% 3.26% 1.22% 3.70%
High Yield 1.32% 2.13% 1.36% 2.13% 1.44% 2.37% 2.11% 2.83% --- ---
Municipal Bond 1.14% 2.19% 0.82% 2.18% 0.83% 2.00% 0.78% 2.19% 0.86% 2.45%
Cash --- --- --- --- --- --- 1.01% --- 1.04% ---
------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) Net investment income was computed using the average month-end shares
outstanding throughout the period.
(d) The Fund's Board of Directors changed its investment policies, effective
February 4, 2000. Prior to that change, the Fund had a policy of investing
at least 80% of its total assets in U.S. Government securities. The fund may
now invest in a more diversified portfolio of debt securities.
(e) Expense ratios including reimbursements, were calculated without the
reduction for custodian fees earnings credits beginning February 1, 1995.
Expense ratios with such reductions would have been as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Income --- --- --- --- --- --- 0.64% 1.85% 1.10% 1.85%
Municipal Bond 1.00% 1.75% 0.82% 2.00% 0.83% 2.00% 0.77% 2.00% 0.85% 2.00%
Cash --- --- 0.89% --- 1.00% --- 1.00% --- 1.00% ---
------------------------------------------------------------------------------------------------------------------
</TABLE>
(f) High Yield Fund was initially capitalized on August 5, 1996, with a net
asset value of $15.00 per share. Percentage amounts for the period have been
annualized, except total return.
<PAGE>
APPENDIX A
--------------------------------------------------------------------------------
DESCRIPTION OF SHORT-TERM INSTRUMENTS
The types of instruments that will form the major part of Cash Fund's
investments are described below:
U.S. GOVERNMENT SECURITIES -- Federal agency securities are debt obligations
which principally result from lending programs of the U.S. Government. Housing
and agriculture have traditionally been the principal beneficiaries of federal
credit programs, and agencies involved in providing credit to agriculture and
housing account for the bulk of the outstanding agency securities.
Some U.S. Government securities, such as Treasury bills and bonds, are supported
by the full faith and credit of the U.S. Treasury; others are supported by the
right of the issuer to borrow from the Treasury; others, such as those of the
Federal National Mortgage Association, are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others such as those of the Student Loan Marketing Association, are supported
only by the credit of the instrumentality.
U.S. Treasury bills are issued with maturities of any period up to one year.
Three-month bills are currently offered by the Treasury on a 13-week cycle and
are auctioned each week by the Treasury. Bills are issued in bearer form only
and are sold only on a discount basis, and the difference between the purchase
price and the maturity value (or the resale price if they are sold before
maturity) constitutes the interest income for the investor.
CERTIFICATES OF DEPOSIT -- A certificate of deposit is a negotiable receipt
issued by a bank or savings and loan association in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate.
COMMERCIAL PAPER -- Commercial paper is generally defined as unsecured
short-term notes issued in bearer form by large well-known corporations and
finance companies. Maturities on commercial paper range from a few days to nine
months. Commercial paper is also sold on a discount basis.
BANKER'S ACCEPTANCES -- A banker's acceptance generally arises from a short-term
credit arrangement designed to enable businesses to obtain funds to finance
commercial transactions. Generally, an acceptance is a time draft drawn on a
bank by an exporter or an importer to obtain a stated amount of funds to pay for
specific merchandise. The draft is then "accepted" by a bank that, in effect,
unconditionally guarantees to pay the face value of the instrument on its
maturity date.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A Prime rating is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. ("Moody's"). Issuers rated Prime are further referred to
by use of numbers 1, 2 and 3 to denote relative strength within this highest
classification. Among the factors considered by Moody's in assigning ratings are
the following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management of
obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
Commercial paper rated "A" by Standard & Poor's Corporation ("S&P") has the
highest rating and is regarded as having the greatest capacity for timely
payment. Commercial paper rated A-1 by S&P has the following characteristics:
(1) liquidity ratios are adequate to meet cash requirements; (2) long-term
senior debt is rated "A" or better; (3) the issuer has access to at least two
additional channels of borrowing; (4) basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; (5) typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is rated A-1, A-2 or A-3.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. -- Aaa. Bonds which are rated Aaa are judged to
be of the best quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt-edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category. The modifier 2 indicates
a mid-range ranking, and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
STANDARD & POOR'S CORPORATION -- AAA. Bonds rated AAA have the highest rating
assigned by Standard & Poor's to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC. Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of obligations. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C. The rating C is reserved for income bonds in which no interest is being paid.
D. Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
<PAGE>
APPENDIX B
--------------------------------------------------------------------------------
DESCRIPTION OF MUNICIPAL BOND RATINGS
The following are summaries of the ratings used by Moody's, Standard & Poor's
and Fitch's applicable to permitted investments of Municipal Bond Fund:
MOODY'S INVESTORS SERVICE, INC.* -- Aaa. Municipal bonds which are rated Aaa are
judged to be of the best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." Interest payments are
protected by a large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa. Municipal bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A. Municipal bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. Although
Industrial Revenue Bonds and Environmental Control Revenue Bonds are tax-exempt
issues, they are included in the corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category. The modifier 2 indicates a mid-range ranking, and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category. Moody's
does not apply numerical modifiers other than Aa1, A1 and Baa1 in its municipal
bond rating system, which offer the maximum security within the Aa, A and Baa
groups, respectively.
STANDARD & POOR'S CORPORATION**-- AAA. Municipal bonds rated AAA are highest
grade obligations. They possess the ultimate degree of
protection as to principal and interest.
AA. Municipal bonds rated AA also qualify as high grade obligations, and in the
majority of instances differ from AAA issues only in small degree.
A. Municipal bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from adverse effects
of changes in economic and trade conditions. Interest and principal are regarded
as safe.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
NOTE: Standard & Poor's ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing within the major categories.
FITCH INVESTORS SERVICE, INC.-- AAA. Bonds considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+".
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB. Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
NOTE: Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the "AAA" category.
RATINGS OF SHORT-TERM SECURITIES
MOODY'S INVESTORS SERVICE -- The following ratings apply to short-term municipal
notes and loans:
MIG 1. Loans bearing this designation are of the best quality, enjoying strong
protection from established cash flows for their servicing or from established
and broad based access to the market for refinancing, or both.
MIG 2. Loans bearing this designation are of high quality with margins of
protection ample although not so large as in the preceding group.
The following ratings apply to both commercial paper and municipal paper:
PRIME-1. Issuers receiving this rating have a superior capacity for repayment of
short-term promissory obligations.
PRIME-2. Issuers receiving this rating have a strong capacity for repayment of
short-term promissory obligations.
STANDARD & POOR'S CORPORATION -- The following ratings apply to short-term
municipal notes:
AAA. This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA. Notes rated AA have a very strong capacity to repay principal and pay
interest and differ from AAA issues only in small degree.
The following ratings apply both to commercial paper and municipal paper:
A-1. This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2. Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated A-1.
FITCH INVESTORS SERVICE -- The following ratings apply to commercial paper:
F-1+. Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+".
F-2. Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
"F-1+" or "F-1".
*Moody's Investors Service, Inc. rates bonds of issuers which have $600,000 or
more of debt, except bonds of educational institutions, projects under
construction, enterprises without established earnings records and situations
where current financial data is unavailable.
**Standard & Poor's Corporation rates all governmental bodies having $1,000,000
or more of debt outstanding unless adequate information is not available.
<PAGE>
APPENDIX C
--------------------------------------------------------------------------------
REDUCED SALES CHARGES
CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Diversified Income, High Yield
and Municipal Bond Funds alone or in combination with Class A shares of certain
other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation or a Statement of Intention (also referred to as a
"Letter of Intent"), the term "Purchaser" includes the following persons: an
individual; an individual, his or her spouse and children under the age of 21; a
trustee or other fiduciary of a single trust estate or single fiduciary account
established for their benefit; an organization exempt from federal income tax
under Section 501(c)(3) or (13) of the Internal Revenue Code; or a pension,
profit-sharing or other employee benefit plan whether or not qualified under
Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Class A shares
of Diversified Income, High Yield or Municipal Bond Fund, a Purchaser may
combine all previous purchases of the Fund with a contemplated current purchase
and receive the reduced applicable front end sales charge. The Distributor must
be notified when a sale takes place which might qualify for the reduced charge
on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of the
Class A shares of Diversified Income, High Yield, Municipal Bond, Growth and
Income, Equity, Global, Total Return, Social Awareness, Mid Cap Value, Small Cap
Growth, Enhanced Index, International, Select 25, Large Cap Growth, Technology
or Ultra Fund in those states where shares of the Fund being purchased are
qualified for sale.
STATEMENT OF INTENTION -- A Purchaser of Diversified Income, High Yield or
Municipal Bond Fund may choose to sign a Statement of Intention within 90 days
after the first purchase to be included thereunder, which will cover future
purchases of Class A shares of those Funds, Equity, Global, Total Return, Social
Awareness, Mid Cap Value, Small Cap Growth, Enhanced Index, International,
Select 25, Large Cap Growth, Technology, Growth and Income or Ultra Fund. The
amount of these future purchases shall be specified and must be made within a
13-month period (or 36-month period for purchases of $1 million or more) to
become eligible for the reduced front-end sales charge applicable to the actual
amount purchased under the statement. Five percent (5%) of the amount specified
in the Statement of Intention will be held in escrow shares until the Statement
is completed or terminated. These shares may be redeemed by the Fund if the
Purchaser is required to pay additional sales charges. Any dividends paid by the
Fund will be payable with respect to escrow shares. The Purchaser bears the risk
that the escrow shares may decrease in value.
A Statement of Intention may be revised during the 13-month (or, if applicable,
36-month) period. Additional shares received from reinvestment of income
dividends and capital gains distributions are included in the total amount used
to determine reduced sales charges.
REINSTATEMENT PRIVILEGE -- Stockholders who redeem their Class A shares of
Diversified Income, High Yield or Municipal Bond Fund have a one-time privilege
(1) to reinstate their accounts by purchasing shares without a sales charge up
to the dollar amount of the redemption proceeds; or (2) to the extent the
redeemed shares would have been eligible for the exchange privilege, to purchase
shares of another of the Funds, Growth and Income, Equity, Global, Total Return,
Social Awareness, Mid Cap Value, Small Cap Growth, Enhanced Index,
International, Select 25, Large Cap Growth, Technology or Ultra Fund, without a
sales charge up to the dollar amount of the redemption proceeds. To exercise
this privilege, a stockholder must provide written notice and the amount to be
reinvested to the Fund within 30 days after the redemption request.
The reinstatement or exchange will be made at the net asset value next
determined after the reinvestment is received by the Fund.
PURCHASES AT NET ASSET VALUE -- Class A shares of Diversified Income, High Yield
and Municipal Bond Funds may be purchased at net asset value by (1) directors,
officers and employees of the Funds, the Funds' Investment Manager or
Distributor; directors, officers and employees of Security Benefit Life
Insurance Company and its subsidiaries; agents licensed with Security Benefit
Life Insurance Company; spouses or minor children of any such agents; as well as
the following relatives of any such directors, officers and employees (and their
spouses): spouses, grandparents, parents, children, grandchildren, siblings,
nieces and nephews; (2) any trust, pension, profit sharing or other benefit plan
established by any of the foregoing corporations for persons described above;
(3) retirement plans where third party administrators of such plans have entered
into certain arrangements with the Distributor or its affiliates provided that
no commission is paid to dealers; and (4) officers, directors, partners or
registered representatives (and their spouses and minor children) of
broker-dealers who have a selling agreement with the Distributor. Such sales are
made upon the written assurance of the purchaser that the purchase is made for
investment purposes and that the securities will not be transferred or resold
except through redemption or repurchase by or on behalf of the Funds.
Class A shares of Diversified Income, High Yield and Municipal Bond Funds may
also be purchased at net asset value when the purchase is made on the
recommendation of (i) a registered investment adviser, trustee or financial
intermediary who has authority to make investment decisions on behalf of the
investor; or (ii) a certified financial planner or registered broker-dealer who
either charges periodic fees to its customers for financial planning, investment
advisory or asset management services, or provides such services in connection
with the establishment of an investment account for which a comprehensive "wrap
fee" is imposed. Class A shares of Diversified Income, High Yield and Municipal
Bond Funds may also be purchased at net asset value when the purchase is made by
retirement plans that (i) buy shares of the Security Funds worth $500,000 or
more; (ii) have 100 or more eligible employees at the time of purchase; (iii)
certify it expects to have annual plan purchases of shares of Security Funds of
$200,000 or more; (iv) are provided administrative services by certain
third-party administrators that have entered into a special service arrangement
with the Security Funds relating to such plans or (v) have at the time of
purchase, aggregate assets of at least $1,000,000. Purchases made pursuant to
this provision may be subject to a deferred sales charge of up to 1% in the
event of a redemption within one year of the purchase.
The Distributor must be notified when a purchase is made that qualifies under
any of the above provisions.
<PAGE>
SECURITY CASH FUND APPLICATION
For IRA/KEOGH/Corporate Plans, complete this Application along with other plan
documents.
MAIL APPLICATION TO: Security Cash Fund, P.O. Box 2548, Topeka, KS 66601
--------------------------------------------------------------------------------
INITIAL INVESTMENT [_] Enclosed is my check for $________ made payable to
(CHECK ONE BOX) Security Cash Fund.
[_] On _______ I/we wired $_______ through ____________
MINIMUM Date Name of Bank
$100
_____________________for Fund account number __________
City State
SUBSEQUENT When investing by wire, call the Fund to advise of the
INVESTMENTS investment. The Fund will supply a control number for
OF $20 CAN BE for initial investment and instructions for having your
MADE AT ANY bank wire Federal funds.
TIME
Attn:_______________________________________
(Include investor's name and account number)
--------------------------------------------------------------------------------
DIVIDENDS [_] Reinvest automatically all daily dividends and
(CHECK ONE BOX) other distributions.
[_] Cash payment of all dividends each month and send
proceeds to investor.
--------------------------------------------------------------------------------
CHECKING [_] Please send a supply of checks permitting me/us to
ACCOUNT redeem shares in this account by writing checks
PRIVILEGE for $100 or more made payable to any person.
COMPLETE SIGNATURE CARD ON REVERSE SIDE. Allow
three weeks for delivery of check supply.
--------------------------------------------------------------------------------
SPECIAL OPTIONS [_] Telephone Exchange
(CHECK APPLICABLE [_] Telephone Redemption
BOXES)
By checking the applicable boxes and signing this
Application, Applicant authorizes the Investment
Manager to honor any telephone request for the
exchange and/or redemption of Fund shares (maximum
telephone redemption is $10,000), subject to the
terms of the Fund's prospectus. The Investment
Manager has established reasonable procedures to
confirm that instructions communicated by telephone
are genuine and may be liable for any losses due to
fraudulent or unauthorized instructions if it fails
to comply with its procedures. The procedures
require that any person requesting a telephone
redemption or exchange provide the account
registration and number and owner's tax
identification number and such request must be
received on a recorded line.
---------------------------------------------------
THE AUTHORIZATION ON REVERSE SIDE FOR CORPORATION,
PARTNERSHIP, TRUST, ETC., MUST BE COMPLETED AND
RETURNED WITH THIS FORM.
[_] Systematic Withdrawal Program (Minimum account
$5,000)
Beginning _______, 19___, you are hereby authorized
and instructed to send a check for $_______________
(minimum $25) drawn on approximately [_] 11th day
[_] 26th day of the month.
Draw payment [_] monthly [_] quarterly
[_] semiannually [_] annually
--------------------------------------------------------------------------------
[_] Individual ________________________________________
[_] Corporate First Middle Last
[_] Non-Profit
[_] Profit- ________________________________________
Sharing First Middle Last
________________________________________
Owner's Taxpayer Identification No. or
Social Security No.
ACCOUNT ________________________________________
REGISTRATION Name of Corporation, Trust, Partnership,
(PLEASE PRINT) etc.
________________________________________
Street Address
________________________________________
City State Zip
Industry Type __________________________
(Farming, Mfg., Sales, etc.)
Telephone Business ( ) ________________
Home ( ) ________________
If address is outside U.S. please indicate if U.S.
Citizen [_] Yes [_] No
--------------------------------------------------------------------------------
TAXPAYER IDENTIFICATION CERTIFICATION: Under the
penalties of perjury, I (1) certify that the number
provided on this form is my correct taxpayer
identification number and (2), *that I am not subject
to backup withholding either because I have not been
notified that I am subject to backup withholding as a
TAX result of a failure to report all interest or
WITHHOLDING dividends, or the Internal Revenue Service has notified
me that I am no longer subject to backup withholding.
* The owner must strike out the language certifying
that they are not subject to backup withholding due to
notified underreporting IF THE INTERNAL REVENUE SERVICE
NOTIFIED THEM THAT THEY ARE SUBJECT TO BACKUP
WITHHOLDING, and they have not received notice from the
service advising that backup withholding has
terminated.
--------------------------------------------------------------------------------
The Internal Revenue Service does not require your
consent to any provision of this document other than
the certifications to avoid backup withholding.
SIGNATURE(S) _______________________________________________________
OF APPLICANTS
OWNER _________________________________________________
_______________________________________________________
INVESTMENT CORPORATE OFFICER, TRUSTEE, ETC.
DEALER
DATE __________________________________________________
NAME OF FIRM __________________________________________
STREET ADDRESS ________________________________________
_______________________________________________________
CITY STATE ZIP
JOINT OWNER ___________________________________________
_______________________________________________________
TITLE
IN CASE OF JOINT OWNERSHIP, BOTH MUST SIGN. IF NO FORM
OF OWNERSHIP IS DESIGNATED, THEN IT WILL BE ASSUMED
THE OWNERSHIP IS "AS JOINT TENANTS, WITH RIGHT OF
SURVIVORSHIP, AND NOT AS TENANTS IN COMMON."
_______________________________________________________
DEALER AUTHORIZED
_______________________________________________________
ACCOUNT REPRESENTATIVE
--------------------------------------------------------------------------------
<PAGE>
Checking Account Privilege - If you have elected this option, the following card
must be completed. This card is similar to one which must be signed when opening
any checking account. All joint owners named in the account registration must
sign this card. Names must be signed exactly as they appear in the account
registration. All persons eligible to sign checks for corporate accounts,
partnerships, trusts, etc. must sign this card.
The payment of funds on the conditions set forth below and on the reverse side
is authorized by the signature(s) appearing on the signature card. Security
Management Company, LLC, the Fund's Transfer Agent, is hereby appointed agent by
the person(s) signing this card and will cause the Fund to redeem a sufficient
number of shares from the account to cover checks presented for payment without
requiring signature guarantees. The Fund and its agents will not be liable for
any loss, expense or cost arising out of check redemptions or checks returned
without payment. SHARES OUTSTANDING IN THE ACCOUNT FOR LESS THAN 15 DAYS WILL
NOT BE LIQUIDATED TO PAY CHECKS PRESENTED UNLESS THE TRANSFER AGENT IS ASSURED
THAT GOOD PAYMENT HAS BEEN COLLECTED THROUGH NORMAL BANKING CHANNELS. The
Transfer Agent has the right not to honor checks that are for less than $100 or
checks in an amount exceeding the value of the account at the time the check is
presented for payment. This privilege is subject to the provisions of the
current prospectus of the Fund as amended from time to time. This agreement may
be modified or terminated at any time by the Fund or the Transfer Agent upon
notification mailed to the shareholder's address of record.
SECURITY CASH FUND SIGNATURE CARD
________________________________________________________________________
Account Number
Authorized Signatures:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
[_] Check here if two signatures are required on checks.
[_] Check here if only one signature required on checks.
In signing this card each signatory agrees to be subject to the customary rules
and regulations governing checking accounts and to the conditions set forth on
the reverse side. If the Checking Account Privilege is established after the
opening of the account, or if any change is made in the above information, all
signatures will have to be guaranteed.
--------------------------------------------------------------------------------
RESOLUTION AUTHORIZING INDIVIDUALS TO MANAGE ACCOUNT
CORPORATE RESOLUTION
I, ______________________, duly elected and acting Secretary of
______________________, a corporation organized and existing under the laws of
______________________, certify that the following resolution is a true and
correct copy of the resolution adopted by the Board of Directors at its regular
meeting held on ______________________, which resolution is currently in full
force and effect: RESOLVED, That the below named individual(s) of this
corporation are hereby authorized to give notice, instructions, complete
necessary forms, execute withdrawals, and to transact any other business
necessary on this corporation's account invested in shares of Security Cash
Fund. FURTHER RESOLVED, That this corporation assumes entire responsibility for,
and agrees to indemnify and hold harmless Security Cash Fund and/or its agents
against any and all claims, liabilities, damages, actions, charges and expense
sustained by action of the below named individual(s).
______________________________ __________________________________________
(PRINT OR TYPE) NAME AND TITLE SIGNATURE(S)
______________________________ __________________________________________
--------------------------------------------------------------------------------
IN WITNESS WHEREOF, I hereunto set my hand and the seal of this corporation this
_____________ day of __________________, 19_____.
(CORPORATE SEAL) SECRETARY____________________________________
--------------------------------------------------------------------------------
AUTHORIZATION FOR PARTNERSHIP, TRUST, OR RETIREMENT PLAN
We, the undersigned, being the principal partners or the trustees of the
______________________ (Partnership or Trust/Plan) hereby state that we are
authorized to invest the assets of the partnership or trust/plan in Security
Cash Fund. We also agree that ______________________ or ______________________
have individual authority to purchase, sell, assign, and transfer securities and
to sign checks issuable by the partnership or the trust/plan redeeming shares of
the Fund. We further state that this individual authority shall continue to be
honored until revoked by written notice from either of us and is received by the
Transfer Agent (Security Management Company, LLC). By signing this
authorization, we agree that Security Cash Fund, Security Management Company,
LLC, and Security Distributors, Inc., shall be indemnified and held harmless
from any loss, damage, cost or claim that may arise from any authorized or
unauthorized use of the assets or checks of the partnership or trust/plan in
connection with the holdings of the Fund.
______________________________ __________________________________________
(PRINT OR TYPE) NAME AND TITLE SIGNATURE(S)
--------------------------------------------------------------------------------
SIGNATURE GUARANTEED BY
________________________________________________________________________________
<PAGE>
FOR MORE INFORMATION
--------------------------------------------------------------------------------
BY TELEPHONE-- Call 1-800-888-2461.
BY MAIL-- Write to:
Security Management Company, LLC
700 SW Harrison
Topeka, KS 66636-0001
ON THE INTERNET -- Reports and other information about the Funds can be viewed
online or downloaded from:
SEC: On the EDGAR Database at http://www.sec.gov
SMC, LLC: http://www.securitybenefit.com
Additional information about the Funds (including the Statement of Additional
Information) can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090. Copies may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, DC
20549-0102.
--------------------------------------------------------------------------------
ANNUAL/SEMI-ANNUAL REPORT -- Additional information about the Funds' investments
is available in the Funds' annual and semi-annual reports to shareholders. In
the Funds' annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected each Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION -- The Funds' Statement of Additional
Information and the Funds' annual or semi-annual reports are available, without
charge upon request by calling the Funds' toll-free telephone number
1-800-888-2461, extension 3127. Shareholder inquiries should be addressed to
SMC, LLC, 700 SW Harrison Street, Topeka, Kansas 66636-0001, or by calling the
Funds' toll-free telephone number listed above. The Funds' Statement of
Additional Information is incorporated into this prospectus by reference.
Each Fund's Investment Company Act file number is listed below:
Security Income Fund.............. 811-2120
Security Municipal Bond Fund...... 811-3225
Security Cash Fund................ 811-3073
<PAGE>
CAPITAL PRESERVATION SUPPLEMENT
================================================================================
SECURITY CAPITAL PRESERVATION FUND
A MEMBER OF THE SECURITY BENEFIT GROUP OF COMPANIES
700 HARRISON, TOPEKA, KANSAS 66636-0001
SUPPLEMENT DATED JULY 26, 2000
TO PROSPECTUS DATED FEBRUARY 1, 2000
The Fund's exchange privilege is amended on the following accounts for which the
Administrator serves as custodian:
* 403(b)(7) accounts
* SEPP accounts (simplified employee pension plans)
* SIMPLE Plans (IRA and 401(k))
Effective September 26, 2000, shareholders of such accounts may no longer
exchange their shares of Diversified Income Fund or High Yield Fund for shares
of Cash Fund. (In addition, shares of Cash Fund are no longer available for
purchase under such accounts as of September 26, 2000.)
THE FOLLOWING REPLACES THE "INVESTMENT ADVISER" SECTION OF THE FUND'S
PROSPECTUS:
INVESTMENT ADVISER -- Under the supervision of the Board of Trustees of the
Portfolio, Bankers Trust Company (Bankers Trust) with headquarters at 130
Liberty Street, New York, New York 10006, acts as the Portfolio's Investment
Adviser. As Investment Adviser, Bankers Trust makes the Portfolio's investment
decisions and assumes responsibility for the securities the Portfolio owns. It
buys and sells securities for the Portfolio and conducts the research that leads
to the purchase and sale decisions. Bankers Trust received a fee of 0.70% of the
Portfolio's average daily net assets for its services in the last fiscal year.
As of September 30, 1999, Bankers Trust had total assets under management of
approximately $285 billion. Bankers Trust is dedicated to servicing the needs of
corporations, governments, financial institutions, and private clients and has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
As of December 31, 1999, BT managed approximately $15 billion in stable value
assets.
At a Special Meeting of Shareholders held on October 8, 1999, shareholders of
the Portfolio approved a new investment advisory agreement with Morgan Grenfell,
Inc. As of October 6, 1999, Morgan Grenfell, Inc. has been renamed Deutsche
Asset Management, Inc. The new investment advisory agreement with Deutsche Asset
Management, Inc. may be implemented within two years of the date of the Special
Meeting upon approval of a majority of the members of the Board of Trustees of
the Portfolio who are not "interested persons", generally referred to as
Independent Trustees. Shareholders of the Portfolio also approved a new
sub-investment advisory agreement among the Trust, Deutsche Asset Management,
Inc. and Bankers Trust under which Bankers Trust may perform certain of Deutsche
Asset Management, Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s
expense, upon approval of the Independent Trustees, within two years of the date
of the Special Meeting. Under the new investment advisory agreement and new
sub-advisory agreement, the compensation paid and the services provided would be
the same as those under the existing advisory agreement with Bankers Trust.
Deutsche Asset Management, Inc. is located at 885 Third Avenue, 32nd Floor, New
York, New York 10022. The firm provides a full range of investment advisory
services to institutional clients. It serves as investment adviser to 11 other
investment companies and as sub-adviser to five other investment companies.
THE FOLLOWING REPLACES THE "INTEREST RATE TRIGGER" SECTION OF THE FUND'S
PROSPECTUS:
INTEREST RATE TRIGGER -- Qualified TSA Redemptions, Qualified IRA Redemptions
and Qualified Plan Redemptions are not subject to the redemption fee at any
time. All other redemptions are subject to the redemption fee, in the amount of
3%, on the proceeds of such redemptions of shares by shareholders on any day
that the "Interest Rate Trigger" (as described below) is "active," and not
subject to those charges on days that the Interest Rate Trigger is "inactive."
The Interest Rate Trigger is active on any day when, as of the preceding day,
the "Reference Index Yield" exceeds the sum of the "Annual Effective Yield" of
the Portfolio's plus 1.35%. The Reference Index Yield on any determination date
is the previous day's closing "Yield to Worst" on the Lehman Brothers
Intermediate Treasury Bond Index(R). The "Annual Effective Yield" generally
represents one day's investment income expressed as an annualized yield and
compounded annually. The status of the Interest Rate Trigger will either be
"active" or "inactive" on any day, and shall be determined on every day that an
NAV is calculated for the Fund. Once the Interest Rate Trigger is active, it
remains active every day until the Reference Index Yield is less than the sum of
the Annual Effective Yield of the Portfolio plus 1.10%, at which time the
Interest Rate Trigger becomes inactive on the following day and remains inactive
every day thereafter until it becomes active again. An example of when and how
the redemption fee will apply to the redemption of shares follows.
--------------------------------------------------------------------------------
The Annual Effective Yield of the Portfolio is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. The
Annual Effective Yield of the Portfolio shall be expressed as a percentage and
calculated on each business day as follows based on the dividend declared for
the previous day:
[(1 + previous day's dividend factor)^365 - 1]
----------------------------------------------
NAV per share
Please note that the Annual Effective Yield of the Fund will be lower than the
annual effective yield of the Portfolio because the Portfolio's expenses are
lower than the Fund's.
--------------------------------------------------------------------------------
A shareholder is considering submitting a request for a redemption of Class A
shares other than a Qualified TSA Redemption, Qualified IRA Redemption or
Qualified Plan Redemption to the Fund on March 2 in the amount of $5,000. Assume
that the Reference Index Yield is 8.65% as of the close of business on March 1
and the Annual Effective Yield of the Portfolio is 6.20% as of that date. The
Annual Effective Yield of the Portfolio plus 1.35% equals 7.55%. Since this is
less than the Reference Index Yield of 8.65%, the Interest Rate Trigger is
active. Thus, the net redemption proceeds to the Shareholder will be $4,850. The
redemption fee will continue to apply to all redemptions which are not Qualified
TSA Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions until
the day after the Reference Index Yield is less than the sum of the Annual
Effective Yield of the Portfolio plus 1.10%. (Please note that this example does
not take into consideration an individual Shareholder's tax issues or
consequences including without limitation any withholding taxes that may apply.)
The spread between the Annual Effective Yield of the Portfolio and the Reference
Index Yield that cause the Interest Rate Trigger to be activated (currently a
spread of 1.35%) and de-activated (currently a spread of 1.10%) reflect the fact
that the Portfolio's entire investment advisory fee is currently being waived.
If the investment advisory fee waiver is discontinued as expected, these spreads
will increase.
The amount of, and method of applying, the Redemption Fee, including the
operation of the Interest Rate Trigger, may be changed in the future. For
example, we expect to reduce the Redemption Fee to 2% and correspondingly adjust
the Interest Rate Trigger so that the Interest Rate Trigger will be active more
frequently than under the current calculation. Shares currently offered in this
prospectus would be subject to the new combination of Redemption Fee and
Interest Rate Trigger.
Shareholders can obtain information regarding when the Interest Rate Trigger is
active, as well as the Annual Effective Yield of the Portfolio and the Reference
Index Yield by calling 1-800-888-2461. The amount of, and method of applying,
the redemption fee, including the operation of the Interest Rate Trigger, may be
changed in the future.
THE FOLLOWING REPLACES THE "QUALIFIED TSA REDEMPTIONS" SECTION OF THE FUND'S
PROSPECTUS:
QUALIFIED TSA REDEMPTIONS -- A redemption of Fund shares can be made at any time
without the assessment of a redemption fee if the redemption is a "Qualified TSA
Redemption." In general, amounts distributed to a taxpayer from a TSA account
prior to the date on which the taxpayer reaches age 59 1/2 are includible in the
taxpayer's gross income and, unless the distribution meets the requirements of a
specific exception under the tax code, are also subject to an early withdrawal
penalty tax. A "Qualified TSA Redemption" is:
* a redemption made by an owner of a TSA account that is not subject to the
early withdrawal penalty tax, provided however, that a rollover from a TSA
account to an IRA account, or a direct trustee-to-trustee transfer of a TSA
account is not a Qualified TSA Redemption unless the owner of the TSA account
or IRA account continues the investment of the transferred amount in the
Fund;
* a transfer to another investment option that is not a competing fund* in your
TSA account if:
> your TSA account does not allow transfers to competing funds or
> your TSA account requires transfers between the Fund and a non-competing
fund to remain in the non-competing fund for a period of at least three
months before being transferred to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 3% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your account allows transfers
to competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
Owners of TSA accounts requesting a redemption of Fund shares will be required
to provide a written statement as to whether the proceeds of the redemption will
be subject to the early withdrawal penalty tax and to identify the specific
exception upon which he or she intends to rely. The information relating to the
early withdrawal penalty tax will form the basis for determining whether a
redemption is a Qualified TSA Redemption. The Fund or the Fund's Administrator
may require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to early withdrawal penalty tax. With respect to a transfer, the owner may be
required to provide evidence that the transfer is not to a competing fund.
THE FOLLOWING REPLACES THE SECOND AND THIRD SENTENCES IN THE "QUALIFIED PLAN
REDEMPTIONS" SECTION OF THE FUND'S PROSPECTUS:
There will be no redemption fee assessed for qualified plan redemptions, which
are:
* Redemptions resulting from the plan participant's death, disability,
retirement or termination of employment;
* Redemptions to fund loans to, or "in service" withdrawals by, a plan
participant; and
* Transfers to other plan investment options that are not competing funds* if:
> your plan does not allow transfers to competing funds or
> your plan requires transfers between the Fund and a non-competing fund to
remain in the non-competing fund for a period of at least three months
before transfer to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 3% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your plan allows transfers to
competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
THE FOLLOWING REPLACES THE "EXCHANGE PRIVILEGE" SECTION OF THE FUND'S
PROSPECTUS:
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Fund may exchange those
shares for shares of the Diversified Income or High Yield series of Security
Income Fund or for shares of other mutual funds distributed by the Distributor
(the "Security Funds"). Shareholders, except those who have purchased through
the following custodial accounts of the Administrator, 403(b)(7) accounts, SEPP
accounts and SIMPLE Plans, may also exchange their shares for shares of Cash
Fund. Exchanges may be made, only in those states where shares of the fund into
which an exchange is to be made are qualified for sale. No service fee is
presently imposed on such an exchange. Class A, Class B and Class C shares of
the Fund may be exchanged for Class A, Class B and, if applicable, Class C
shares, respectively, of another Security Fund. A Redemption Fee may be assessed
on an exchange from the Fund to another Security Fund if the Interest Rate
Trigger is active. Any applicable contingent deferred sales charge will be
calculated from the date of the initial purchase.
Exchanges of Class A shares from the Fund are made at net asset value without a
front-end sales charge if (1) the shares have been owned for at least 90
consecutive days prior to the exchange, (2) the shares were acquired pursuant to
a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from the Fund, other than those described above, are made at net asset
value plus the sales charge described in the prospectus of the other Security
Fund being acquired, less the sales charge paid on the shares of the Fund at the
time of original purchase.
Shareholders should contact the Fund before requesting an exchange in order to
ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Administrator will
first cause to be exchanged those shares which would not be subject to any sales
charges. The terms of an employee-sponsored retirement plan may affect a
shareholder's right to exchange shares as described above. Contact your plan
sponsor or administrator to determine if all of the exchange options discussed
above are available under your plan.
For tax purposes, an exchange is a sale of shares which may result in a taxable
gain or loss. Special rules may apply to determine the amount of gain or loss on
an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges are made upon receipt of a properly completed Exchange Authorization
form. This privilege may be changed or discontinued at any time at the
discretion of the management of the Fund upon 60 days' notice to shareholders. A
current prospectus of the Security Fund into which an exchange is made will be
given to each shareholder exercising this privilege.
THE FOLLOWING HAS BEEN ADDED TO FOOTNOTE (B) OF THE "FINANCIAL HIGHLIGHTS"
SECTION OF THE FUND'S PROSPECTUS:
Total returns for the Fund assume that an investor did not pay a redemption fee
at the end of the periods shown.
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE>
SECURITY FUNDS
================================================================================
PROSPECTUS
FEBRUARY 1, 2000,
AS SUPPLEMENTED JULY 26, 2000
* Security Capital Preservation Fund
--------------------------------------------------------------------------------
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
--------------------------------------------------------------------------------
[SBG LOGO]
SECURITY DISTRIBUTORS, INC.
A Member of The Security Benefit
Group of Companies
<PAGE>
OVERVIEW OF THE SECURITY CAPITAL PRESERVATION FUND
GOAL........................................................................ 2
CORE STRATEGY............................................................... 2
INVESTMENT POLICIES AND STRATEGIES.......................................... 2
PRINCIPAL RISKS OF INVESTING IN THE FUND.................................... 2
WHO SHOULD CONSIDER INVESTING IN THE FUND................................... 2
FEES AND EXPENSES OF THE FUND............................................... 3
A DETAILED LOOK AT THE SECURITY CAPITAL PRESERVATION FUND
OBJECTIVE................................................................... 4
STRATEGY.................................................................... 4
PRINCIPAL INVESTMENTS....................................................... 4
Fixed Income Securities................................................. 4
Wrapper Agreements...................................................... 5
Short-Term Investments.................................................. 6
Derivative Instruments.................................................. 6
Other Investments....................................................... 6
INVESTMENT PROCESS.......................................................... 6
RISKS ...................................................................... 7
Primary Risks........................................................... 7
Secondary Risk.......................................................... 8
MANAGEMENT OF THE FUND...................................................... 9
Board of Directors...................................................... 9
Investment Adviser...................................................... 9
Other Services.......................................................... 9
Portfolio Managers...................................................... 9
CALCULATING THE FUND'S SHARE PRICE.......................................... 10
ORGANIZATIONAL STRUCTURE.................................................... 10
BUYING SHARES............................................................... 10
Class A Shares.......................................................... 10
Class A Distribution Plan............................................... 11
Class B Shares.......................................................... 11
Class B Distribution Plan............................................... 11
Class C Shares.......................................................... 11
Class C Distribution Plan............................................... 12
Waiver of Deferred Sales Charge......................................... 12
Confirmations and Statements............................................ 12
SELLING SHARES.............................................................. 12
Interest Rate Trigger................................................... 13
Qualified TSA Redemptions............................................... 14
Qualified IRA Redemptions............................................... 14
Qualified Plan Redemptions.............................................. 15
Payment of Redemption Proceeds.......................................... 15
DIVIDENDS AND DISTRIBUTIONS................................................. 15
TAX CONSIDERATIONS.......................................................... 15
SHAREHOLDER SERVICES........................................................ 16
Accumulation Plan....................................................... 16
Systematic Withdrawal Program........................................... 16
Exchange Privilege...................................................... 16
Retirement Plans........................................................ 17
GENERAL INFORMATION......................................................... 17
Shareholder Inquiries................................................... 17
FINANCIAL HIGHLIGHTS........................................................ 18
APPENDIX A - REDUCED SALES CHARGES.......................................... 19
Class A Shares.......................................................... 19
Rights of Accumulation.................................................. 19
Statement of Intention.................................................. 19
Reinstatement Privilege................................................. 19
<PAGE>
OVERVIEW OF THE SECURITY CAPITAL PRESERVATION FUND
GOAL
The Fund seeks a high level of current income while seeking to maintain a stable
value per share.
CORE STRATEGY
The Fund invests primarily in fixed income securities. The Fund also enters into
contracts with financial institutions that are designed to stabilize the Fund's
share value.
INVESTMENT POLICIES AND STRATEGIES
The Fund invests all of its assets in a master portfolio with the same
investment goal as the Fund. The Fund, through the master portfolio, seeks to
achieve its goal by investing in fixed income securities of varying maturities,
money market instruments and futures and options (including futures and options
traded on foreign exchanges, such as bonds and equity indices of foreign
countries). The Fund attempts to maintain a stable share value by entering into
contracts, called Wrapper Agreements, with financial institutions, such as
insurance companies or banks.
PRINCIPAL RISKS OF INVESTING IN THE FUND
Although the Fund seeks to preserve a stable share value, there are risks
associated with fixed income investing. For example, the value of fixed income
securities could fluctuate or fall if:
* There is a sharp rise in interest rates.
* An issuer's creditworthiness declines.
* Changes in interest rates or economic downturns have a negative effect on
issuers in the financial services industry.
The Fund attempts to offset these risks by purchasing Wrapper Agreements. The
use of Wrapper Agreements has its own risks, including:
* The possibility of default by a financial institution providing a Wrapper
Agreement ("Wrapper Provider").
* The inability of the Fund to obtain Wrapper Agreements covering the Fund's
assets.
The Fund is also subject to the risk that the Portfolio's Investment Adviser
incorrectly judges the potential risks and rewards of derivative investing.
WHO SHOULD CONSIDER INVESTING IN THE FUND
You should consider investing in the Fund if you are looking for an investment
that seeks to earn current income higher than money market mutual funds over
most time periods and to preserve the value of your investment. In addition, the
Fund is offered as an alternative to short-term bond funds and as a comparable
investment to stable value or guaranteed investment contract options offered in
employee benefit plans.
The Fund offers shares only to retirement accounts such as tax-sheltered annuity
custodial accounts (TSAs), individual retirement accounts (IRAs) and to
employees investing through participant-directed employee benefit plans. IRAs
include traditional IRAs, Roth IRAs, education IRAs, simplified employee pension
IRAs (SEP IRAs), savings incentive match plans for employees (SIMPLE IRAs), and
Keogh plans.
You should not consider investing in the Fund if you seek capital growth.
Although it provides a convenient means of diversifying short-term investments,
the Fund by itself does not constitute a balanced investment program.
--------------------------------------------------------------------------------
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Although the Fund seeks to preserve a stable share value, it is possible to lose
money by investing in the Fund.
--------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (fees paid directly from your investment)
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS A SHARES(1) CLASS B SHARES(2) CLASS C SHARES(3)
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 3.5% None None
Maximum Sales Charge Imposed on Reinvested Dividends None None None
Maximum Deferred Sales Charge (as a percentage of original None 5% during the first year, 1%
purchase price or redemption proceeds, whichever is lower) decreasing to 0% in the
sixth and following years
Maximum Redemption Fee(4) 3% 3% 3%
------------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Purchases of Class A shares in amounts of $1,000,000 or more are not subject to an initial sales load; however, a deferred sales
charge of 1% is imposed in the event of redemption within one year of purchase.
2 Class B shares convert tax-free to Class A shares automatically after eight years.
3 A deferred sales charge of 1% is imposed in the event of redemption within one year of purchase.
4 The redemption fee payable to the master portfolio is designed primarily to offset those expenses which may be incurred by the
master portfolio in connection with certain shareholder redemptions. Proceeds from the redemption fee will be used by the master
portfolio to offset the actual portfolio and administrative costs associated with such redemptions, including custodian, transfer
agent, settlement, and account processing costs, as well as the adverse impact of such redemptions on the premiums paid for
Wrapper Agreements and the yield on Wrapper Agreements. The redemption fee may also have the effect of discouraging redemptions
by shareholders attempting to take advantage of short-term interest rate movements. The redemption fee does not apply to
Qualified TSA, Qualified IRA or Qualified Plan Redemptions. The amount of, and method of applying, the Redemption Fee, including
the operation of the Interest Rate Trigger, may be changed in the future. For example, we may reduce the Redemption Fee to 2% and
correspondingly adjust the Interest Rate Trigger so that the Interest Rate Trigger will be active more frequently than under the
current calculation. Shares currently offered in this prospectus would be subject to the new combination of Redemption Fee and
Interest Rate Trigger.
</FN>
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
----------------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)
----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL ANNUAL FUND
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL FUND TOTAL WAIVERS OPERATING EXPENSES WITH
FEES(1) (12B-1) FEES EXPENSES(2) OPERATING EXPENSES(3) AND REDUCTIONS WAIVERS OR REDUCTIONS(4)
<S> <C> <C> <C> <C> <C> <C>
Class A 0.70% 0.25% 1.23% 2.18% 0.43% 1.75%
Class B 0.70% 0.75% 1.23% 2.68% 0.43% 2.25%
Class C 0.70% 0.50% 1.23% 2.43% 0.43% 2.00%
----------------------------------------------------------------------------------------------------------------------------
<FN>
1 The Fund does not directly pay a management fee. However, the underlying master portfolio in which the Fund invests, the
PreservationPlus Income Portfolio (the "Portfolio"), does pay a management fee to its investment adviser, Bankers Trust
Company. Bankers Trust Company has contractually agreed to waive its advisory fee from the Portfolio until September 30,
2000.
2 "Other Expenses" are based on estimates for the current fiscal year (including amounts paid by the Portfolio for wrapper
agreements) and do not take into account the effect of any expense waivers or reimbursements.
3 Information on the annual Fund operating expenses reflects the expenses of both the Fund and the Portfolio.
4 Security Management Company, LLC ("SMC"), the Fund's Administrator, has agreed that if the total annual expenses of the
Fund, exclusive of interest, taxes, extraordinary expenses, brokerage fees and commissions, and Rule 12b-1 fees, but
inclusive of its own fee, exceeds 1.50%, SMC will contribute to the Fund an amount and/or waive its fee as may be
necessary to insure that the total annual expenses do not exceed such amount.
----------------------------------------------------------------------------------------------------------------------------
As noted in footnote number 1 above, Bankers Trust Company has contractually agreed to waive its advisory fee from the
Portfolio until September 30, 2000. It also voluntarily waived an additional .22% of Portfolio expenses in the fiscal year
ended September 30, 1999. Taking into account both the contractual and voluntary fee waivers, the estimated expenses of the
Fund for the current fiscal year are 1.26% for Class A, 1.76% for Class B and 1.51% for Class C.
----------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated. The Example also assumes that your investment has a 5% return each
year and that the Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
You would pay the following expenses if you redeemed your shares at the end of
each period.
--------------------------------
1 YEAR 3 YEARS
--------------------------------
Class A $522 $ 882
Class B 728 1,003
Class C 303 627
--------------------------------
You would pay the following expenses if you redeemed your shares at the end of
each period and were assessed the 3% Redemption Fee.
--------------------------------
1 YEAR 3 YEARS
--------------------------------
Class A $ 822 $1,182
Class B 1,028 1,303
Class C 603 927
--------------------------------
You would pay the following expenses if you did not redeem your shares.
--------------------------------
1 YEAR 3 YEARS
--------------------------------
Class A $522 $882
Class B 228 703
Class C 203 627
--------------------------------
A DETAILED LOOK AT THE SECURITY CAPITAL PRESERVATION FUND
OBJECTIVE
The Security Capital Preservation Fund seeks a high level of current income
while seeking to maintain a stable value per share.
While priority is given to earning income and maintaining the value of the
Fund's principal, all fixed income securities, including U.S. government
obligations, can decrease in value when, for example, interest rates change or
an issuer's creditworthiness changes. THE FUND'S OBJECTIVE IS NOT A FUNDAMENTAL
POLICY AND MAY BE CHANGED BY THE FUND'S BOARD OF DIRECTORS.
STRATEGY
As noted previously, the Fund seeks its objective by investing its assets in the
PreservationPlus Income Portfolio. Accordingly, references to the Fund investing
in particular types of securities or asset classes are actually references to
what is done by the underlying Portfolio.
The Fund seeks current income that is higher than that of money market funds by
investing in fixed income securities with varying maturities and maintaining an
average portfolio DURATION of 2.5 to 4.5 years. In addition, the Fund enters
into Wrapper Agreements designed to stabilize the Fund's share value. Wrapper
Agreements are provided by financial institutions, such as insurance companies
and banks. In an attempt to enhance return, the Fund also employs a global asset
allocation strategy, which evaluates the equity, bond, cash and currency
opportunities across domestic and international markets.
--------------------------------------------------------------------------------
DURATION measures the sensitivity of bond prices to changes in interest rates.
The longer the duration of a bond, the longer it will take to repay the
principal and interest obligations and the more sensitive it is to changes in
interest rates. Investors in longer-duration bonds face more risk as interest
rates rise--but also are more likely to receive more income from their
investment to compensate for the risk.
--------------------------------------------------------------------------------
PRINCIPAL INVESTMENTS
FIXED INCOME SECURITIES -- The Fund invests at least 65% of its total assets in
fixed income securities rated, at the time of purchase, within the top four
long-term rating categories by a nationally recognized statistical rating
organization (or, if unrated, are determined to be of similar quality by the
Portfolio's Investment Adviser). However, the Fund may invest up to 10% of its
assets in high yield debt securities (also known as junk bonds) rated in the
fifth and sixth long-term rating categories by a nationally recognized
statistical rating organization (or, if unrated, are determined to be of similar
quality by the Portfolio's Investment Adviser).
Fixed income securities in which the Fund may invest include the following:
* U.S. government securities that are issued or guaranteed by the U.S.
Treasury, or by agencies or instrumentalities of the U.S. Government.
* U.S. dollar-denominated securities issued by domestic or foreign
corporations, foreign governments or supranational entities.
* U.S. dollar-denominated asset-backed securities issued by domestic or foreign
entities.
* Mortgage pass-through securities issued by governmental and non-governmental
issuers.
* Collateralized mortgage obligations and real estate mortgage investment
conduits.
* Obligations issued or guaranteed, or backed by securities issued or
guaranteed, by the U.S. government, or any of its agencies or
instrumentalities, including CATS, TIGRs, TRs and zero coupon securities,
which are securities consisting of either the principal component or the
interest component of a U.S. Treasury bond.
The following policies are employed to attempt to reduce the risks involved in
investing in fixed income securities:
* Assets are allocated among a diversified group of issuers.
* Investments are primarily made in fixed income securities that are rated, at
the time of purchase, within the top four rating categories as rated by
Moody's Investors Service, Inc., Standard & Poor's Ratings Services or Duff &
Phelps Credit Rating Co., another nationally recognized statistical rating
organization, or, if unrated, determined by the Portfolio's investment
adviser to be of comparable quality.
* Average portfolio duration of 2.5 to 4.5 years is targeted by investing in
fixed income securities with short- to intermediate term MATURITIES.
Generally, rates of short-term investments fluctuate less than longer-term
investments.
--------------------------------------------------------------------------------
MATURITY measures the time remaining until an issuer must repay a bond's
principal in full.
--------------------------------------------------------------------------------
WRAPPER AGREEMENTS -- The Fund enters into Wrapper Agreements with insurance
companies, banks and other financial institutions. Unlike traditional fixed
income portfolios, the Fund's purchases of Wrapper Agreements should offset
substantially the price fluctuations typically associated with fixed income
securities. In using Wrapper Agreements, the Fund seeks to eliminate the effect
of any gains or losses on the value per share when the Fund sells securities.
Normally, these agreements require the Wrapper Provider to maintain the BOOK
VALUE of a portion of the Fund's assets (Covered Assets) if certain events
occur. More than one Wrapper Provider provides coverage with respect to the same
securities and, when applicable, pays based on the pro rata portion of the
Fund's assets that it covers.
--------------------------------------------------------------------------------
BOOK VALUE of the Covered Assets is their purchase price, plus interest on the
Covered Assets at the Crediting Rate, less an adjustment to reflect any
defaulted securities.
--------------------------------------------------------------------------------
In general, if the Fund sells securities to meet shareholder redemptions and the
market value (plus accrued interest) of those securities is less than their book
value, the Wrapper Provider must pay the difference to the Fund. On the other
hand, if the Fund sells securities and the market value (plus accrued interest)
is more than the book value, the Fund must pay the difference to the Wrapper
Provider. The timing of payments between the Fund and the Wrapper Provider vary.
The Crediting Rate:
* Is the actual interest earned on the Covered Assets based on the formula
stated in the Wrapper Agreements and is generally adjusted monthly for price
movements in the Covered Assets and amounts payable to or receivable from the
Wrapper Provider; and
* Is a significant component of the Fund's yield.
The following policies are employed to attempt to reduce the risks involved in
using Wrapper Agreements:
* Wrapper Agreements are purchased from multiple issuers, each of which has
received a HIGH QUALITY RATING from Moody's or Standard & Poor's.
* The financial well being of the issuers of the securities in which the Fund
invests and the Wrapper Providers providing Wrapper Agreements to the Fund
are monitored on a continuous basis.
Generally, unless the Wrapper Agreement requires the sale of a security that has
been downgraded below a specified rating, the Fund is not required to dispose of
any security or Wrapper Agreement whose issuer's rating has been downgraded.
--------------------------------------------------------------------------------
A HIGH QUALITY RATING means a security is rated in the top two long-term ratings
categories by a nationally recognized statistical rating organization.
--------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- The Fund will also invest in short-term investments,
including money market mutual funds, to meet shareholder withdrawals and other
liquidity needs. These short-term investments, such as commercial paper and
certificates of deposit, will be rated, at the time of purchase, in one of the
top two short-term rating categories by a nationally recognized statistical
rating organization, or if unrated, are determined to be of similar quality by
the Portfolio's Investment Adviser.
DERIVATIVE INSTRUMENTS -- The Fund may invest in various instruments commonly
known as "derivatives" to increase its exposure to certain groups of securities.
The derivatives that the Fund may use include FUTURES CONTRACTS, OPTIONS ON
FUTURES CONTRACTS AND FORWARD CONTRACTS. The Fund may use derivatives to keep
cash on hand to meet shareholder redemptions, as a hedging strategy to maintain
a specific portfolio duration, or to protect against market risk. When employing
the global asset allocation strategy, the Fund may use derivatives for
leveraging, which is a way to attempt to enhance returns. We will only use these
securities if we believe that their return potential more than compensates for
the extra risks associated with using them.
OTHER INVESTMENTS -- The Fund may also invest in and utilize the following
investments and investment techniques and practices: Rule 144A securities,
when-issued and delayed delivery securities, repurchase agreements, reverse
repurchase agreements and dollar rolls.
--------------------------------------------------------------------------------
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS are commonly used for
traditional hedging purposes to attempt to protect an investor from the risks of
changing interest rates, securities prices or currency exchange rates and for
cash management purposes as a low cost method of gaining exposure to a
particular securities market without investing directly in those securities.
--------------------------------------------------------------------------------
INVESTMENT PROCESS
The Fund's investment strategy emphasizes a diversified exposure to higher
yielding mortgage, corporate and asset-backed sectors of the investment grade
fixed income markets. These "spread" sectors have historically offered higher
returns than U.S. government securities. The investment process focuses on a
top-down approach, first focused on the sector allocations, then using relative
value analysis to select the best securities within each sector. To select
securities, the Portfolio's investment adviser analyzes such factors as credit
quality, interest rate sensitivity and spread relationships between individual
bonds.
The Fund also purchases Wrapper Agreements, which seek to offset price
fluctuations of the fixed income securities and, as a result, provide a stable
value per share for the Fund. A primary emphasis is placed on assessing the
credit quality of financial institutions that may provide a Wrapper Agreement to
the Fund. The Portfolio's Investment Adviser performs proprietary credit
analysis on a large universe of issuers and actively manages the negotiation and
maintenance of Wrapper Agreements.
The global asset allocation strategy attempts to enhance long-term returns and
manage risk by responding effectively to changes in global markets using
instruments including but not limited to, futures, options and currency
forwards. This strategy employs a multi-factor global asset allocation model
that evaluates equity, bond, cash and currency opportunities across domestic and
international markets.
In implementing the global asset allocation strategy, the Fund invests in
options and futures based on any type of security or index including options and
futures traded on foreign exchanges, such as bonds and equity indices of foreign
countries. Some options and futures strategies, including selling futures,
buying puts and writing calls, hedge the Fund's investments against price
fluctuations. Other strategies, including buying futures, writing puts and
buying calls, tend to increase and will broaden the Fund's market exposure.
Options and futures may be combined with each other, or with forward contracts,
in order to adjust the risk and return characteristics of an overall strategy.
The Fund may also enter into forward currency exchange contracts (agreements to
exchange one currency for another at a future date), may buy and sell options
and futures contracts relating to foreign currencies and may purchase securities
indexed to foreign currencies. Currency management strategies allow shifts of
investment exposure from one currency to another to attempt to profit from
anticipated declines in the value of a foreign currency relative to the U.S.
dollar.
Successful implementation of the global asset allocation strategy depends on the
Portfolio's Investment Adviser's judgment as to the potential risks and rewards
of implementing the different types of strategies.
TEMPORARY DEFENSIVE POSITION. From time to time a temporary defensive position
may be adopted in response to extraordinary adverse political, economic or
market events. Up to 100% of the Fund's assets could be placed in short-term
obligations within one of the top two investment ratings. These short-term
obligations may not be covered by a Wrapper Agreement. To the extent such a
position is adopted, the Fund may not meet its goal of a high level of current
income or a stable net asset value.
--------------------------------------------------------------------------------
PORTFOLIO TURNOVER rate measures the frequency that the Portfolio sells and
replaces the securities it holds within a given period. Historically, this Fund
has had a high portfolio turnover rate. High turnover can increase the Fund's
transaction costs, thereby lowering its returns.
--------------------------------------------------------------------------------
RISKS
Set forth below are some of the prominent risks associated with fixed income
investing, the use of Wrapper Agreements, and the risks of investing in general.
Although an attempt is made to assess the likelihood that these risks may
actually occur and to limit them, there can be no guarantee that it will
succeed.
PRIMARY RISKS --
INTEREST RATE RISK. All debt securities face the risk that the securities will
decline in value because of changes in interest rates. Generally, investments
subject to interest rate risk will decrease in value when interest rates rise
and increase when interest rates fall. If interest rates are falling, the Fund's
income may decline because of the investment or reinvestment of assets in fixed
income securities.
CREDIT RISK. An investor purchasing a fixed income security faces the risk that
the value of the security may decline because the creditworthiness of the issuer
may decline or the issuer may fail to make timely payment of interest or
principal.
WRAPPER AGREEMENT RISK. Although the Wrapper Agreements attempt to maintain a
stable value per share, there are risks associated with the Wrapper Agreements,
including:
* A Wrapper Provider could default, which could cause the Fund's share value to
fluctuate or fall and could result in losses for Plan participants who sell
their shares.
* The Wrapper Agreements may require the Fund to maintain a certain percentage
of its assets in short-term investments. This could result in a lower return
than if the Fund invested those assets in longer-term securities. The Fund
may elect not to cover a fixed income security with a remaining maturity of
60 days or less, cash or short-term investments with Wrapper Agreements.
* The Wrapper Agreements generally do not protect the Fund from loss caused by
a fixed income security issuer's default on principal or interest payments.
* The Fund may not be able to obtain Wrapper Agreements to cover all of its
assets.
* If a Wrapper Provider is unable to make timely payments, the Portfolio's
Board may determine the fair value of that Wrapper Agreement to be less than
the difference between the book value and the market value, which could cause
the Fund's net asset value to fluctuate.
* Compared to investing in a traditional fixed income fund, the Fund trades the
potential for capital appreciation and some yield for protection from a
decline in the value of its holdings caused by changes in interest rates.
MARKET RISK. Although individual securities may outperform their market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
SECURITY SELECTION RISK. While the Fund invests in short- to intermediate-term
securities, which by nature are relatively stable investments, the risk remains
that the securities selected will not perform as expected. This could cause the
Fund's returns to lag behind those of money market funds.
LIQUIDITY RISK. Liquidity risk is the risk that a security cannot be sold
quickly at a price that reflects the estimate of its value. Because there is no
active trading market for Wrapper Agreements, the Fund's investments in the
Wrapper Agreements are considered illiquid. In an effort to minimize this risk,
the Fund limits its investments in illiquid securities, including Wrapper
Agreements, to 15% of net assets.
PRICING RISK. The securities in the Portfolio are valued at their stated market
value if price quotations are available and, if not, by the method that most
accurately reflects their current worth in the judgment of the Portfolio's Board
of Trustees.
If Wrapper Agreements are not in place, this procedure implies an unavoidable
risk, the risk that the prices used are higher or lower than the prices that the
securities might actually command if they were sold. If the securities are
valued too highly, you may end up paying too much for Fund shares when you buy.
If the price of the securities are undervalued, you may not receive the full
market value for your Fund shares when you sell.
According to the procedures adopted by the Portfolio's Board of Trustees, the
fair value of the Wrapper Agreements generally will equal the difference between
the book value and the market value (plus accrued interest) of the Fund's
assets. In determining fair value, the Board will consider the creditworthiness
and ability of a Wrapper Provider to pay amounts due under the Wrapper
Agreements. If the Board of Trustees determines that a Wrapper Agreement should
not be valued this way, the net asset value of the Fund could fluctuate.
DERIVATIVE RISK. Derivatives are more volatile and less liquid than traditional
fixed income securities. Risks associated with derivatives include:
* the derivative may not fully offset the underlying positions;
* the derivatives used for risk management may not have the intended effects
and may result in losses or missed opportunities; and
* the possibility the Fund cannot sell the derivative because of an illiquid
secondary market.
The use of derivatives for leveraging purposes tends to magnify the effect of an
instrument's price changes as market conditions change.
If the Fund invests in futures contracts and options on futures contracts for
non-hedging purposes, the margin and premiums required to make those investments
will not exceed 5% of the Fund's net asset value after taking into account
unrealized profits and losses on the contracts. Futures contracts and options on
futures contracts used for non-hedging purposes involve greater risks than other
investments.
FOREIGN INVESTING RISK. The Fund faces the risks detailed below in the portion
of its investments it devotes to foreign securities.
* POLITICAL RISK. Profound social changes and business practices that depart
from developed-market norms have hindered the growth of capital markets in
developing nations in the past. High levels of debt have tended to make them
overly reliant on foreign capital investment and vulnerable to capital
flight. Governments have limited foreign investors' access to capital markets
and restricted the flow of profits overseas. They have resorted to high
taxes, expropriation and nationalization. All these threats remain a part of
emerging-market investing in particular today.
* INFORMATION RISK. Foreign accounting, auditing, and financial reporting and
disclosure standards tend to be less stringent than those in the United
States. And the risks of investors acting on incomplete or inaccurate
information are correspondingly greater. Compounding the problem, local
investment research often lacks the sophistication to spot potential
pitfalls.
CURRENCY RISK. The Fund invests in foreign securities denominated in foreign
currencies. This creates the possibility that changes in foreign exchange rates
will affect the value of foreign securities and, thus, the U.S. dollar amount of
income or gain received on these securities. The Portfolio's Investment Adviser
seeks to minimize this risk by actively managing the currency exposure of the
Fund. There is no guarantee that these currency management activities will work
and they could cause losses to the Fund.
SECONDARY RISK --
LOWER RATED SECURITIES. The Fund may invest in debt securities rated in the
fifth and sixth long-term ratings categories. The market for lower-rated debt
securities may be thinner and less active than that for higher rated debt
securities, which can adversely affect the prices at which the lower-rated
securities are sold. If market quotations are not available, lower-rated debt
securities will be valued in accordance with procedures established by the
Portfolio's Board of Trustees. Judgment plays a greater role in valuing high
yield corporate debt securities than is the case for securities for which more
external sources for quotations and last sale information is available. Adverse
publicity and changing investor perception may affect the availability of
outside pricing services to value lower-rated debt securities and the Fund's
ability to dispose of these securities. Since the risk of default is higher for
lower-rated securities, the Investment Adviser's research and credit analysis
are an especially important part of managing securities of this type.
In considering investments for the Fund, the Portfolio's Investment Adviser
attempts to identify those issuers of high yielding debt securities whose
financial conditions are adequate to meet future obligations, have improved or
are expected to improve in the future. The Investment Adviser's analysis focuses
on relative values based on such factors as interest on dividend coverage, asset
coverage, earnings prospects and the experience and managerial strength of the
issuer.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS -- The Fund's shareholders, voting in proportion to the
number of shares each owns, elect a Board of Directors, and the Directors
supervise all of the Fund's activities on their behalf.
INVESTMENT ADVISER -- Under the supervision of the Board of Trustees of the
Portfolio, Bankers Trust Company (Bankers Trust) with headquarters at 130
Liberty Street, New York, New York 10006, acts as the Portfolio's Investment
Adviser. As Investment Adviser, Bankers Trust makes the Portfolio's investment
decisions and assumes responsibility for the securities the Portfolio owns. It
buys and sells securities for the Portfolio and conducts the research that leads
to the purchase and sale decisions. Bankers Trust received a fee of 0.70% of the
Portfolio's average daily net assets for its services in the last fiscal year.
As of September 30, 1999, Bankers Trust had total assets under management of
approximately $285 billion. Bankers Trust is dedicated to servicing the needs of
corporations, governments, financial institutions, and private clients and has
invested retirement assets on behalf of the nation's largest corporations and
institutions for more than 50 years. The scope of the firm's capability is
broad: it is a leader in both the active and passive quantitative investment
disciplines and maintains a major presence in stock and bond markets worldwide.
As of December 31, 1999, BT managed approximately $15 billion in stable value
assets.
At a Special Meeting of Shareholders held on October 8, 1999, shareholders of
the Portfolio approved a new investment advisory agreement with Morgan Grenfell,
Inc. As of October 6, 1999, Morgan Grenfell, Inc. has been renamed Deutsche
Asset Management, Inc. The new investment advisory agreement with Deutsche Asset
Management, Inc. may be implemented within two years of the date of the Special
Meeting upon approval of a majority of the members of the Board of Trustees of
the Portfolio who are not "interested persons", generally referred to as
Independent Trustees. Shareholders of the Portfolio also approved a new
sub-investment advisory agreement among the Trust, Deutsche Asset Management,
Inc. and Bankers Trust under which Bankers Trust may perform certain of Deutsche
Asset Management, Inc.'s responsibilities, at Deutsche Asset Management, Inc.'s
expense, upon approval of the Independent Trustees, within two years of the date
of the Special Meeting. Under the new investment advisory agreement and new
sub-advisory agreement, the compensation paid and the services provided would be
the same as those under the existing advisory agreement with Bankers Trust.
OTHER SERVICES -- The Fund's administrator, Security Management Company, LLC
("SMC" or the "Administrator") provides administrative services, fund accounting
and transfer agency services to the Fund. Bankers Trust provides administrative
services--such as portfolio accounting, legal services and other services--for
the Portfolio.
Pursuant to a separate Management Services Agreement, SMC also performs certain
other services on behalf of the Fund. Under this Agreement, SMC provides, among
other things, feeder fund management and administrative services to the Fund
which include:
* monitoring the performance of the Portfolio;
* coordinating the Fund's relationship with the Portfolio;
* communicating with the Fund's Board of Directors and shareholders regarding
the Portfolio's performance and the Fund's two tier structure, and in
general;
* assisting the Board of Directors of the Fund in all aspects of the
administration and operation of the Fund.
For these services, the Fund pays SMC a fee at the annual rate of .20% of its
average daily net assets, calculated daily and payable monthly.
For providing certain shareholder services to the shareholders of the Fund, SMC
receives from Bankers Trust a fee which is equal on an annual basis to .20% of
the aggregate net assets of the Fund invested in the Portfolio. The fee is not
an expense of the Fund or the Portfolio.
PORTFOLIO MANAGERS --
ERIC KIRSCH, Portfolio Manager of Bankers Trust Company, has managed the Fixed
Income Securities of the Portfolio since its inception in May 1999. Mr. Kirsch
joined Bankers Trust in 1980. He is a Chartered Financial Analyst with ten years
of investment experience.
LOUIS R. D'ARIENZO, Portfolio Manager of Bankers Trust Company, has managed the
Fixed Income Securities of the Portfolio since its inception in May 1999. Mr.
D'Arienzo joined Bankers Trust in 1981 and has 17 years investment experience.
JOHN D. AXTELL, JR., Portfolio Manager of Bankers Trust Company, is responsible
for the portfolio management and trading activities relating to Stable Value
Investments for client portfolios. Mr. Axtell joined Bankers Trust in 1990.
CALCULATING THE FUND'S SHARE PRICE
The Fund's share price is calculated daily (also known as the "net asset value"
or "NAV") in accordance with the standard formula for valuing mutual fund shares
at the close of regular trading on the New York Stock Exchange every day the
Exchange is open for business. The formula calls for deducting all of a Fund's
liabilities from the total value of its assets--the market value of the
securities it holds, plus its cash reserves--and dividing the result by the
number of shares outstanding.
According to the procedures adopted by the Board of Trustees of the Portfolio,
the fair value of the Wrapper Agreements generally will equal the difference
between the book value and the market value (plus accrued interest) of the
Portfolio's assets. In determining fair value, the Board will consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreements.
--------------------------------------------------------------------------------
The Exchange is open every week, Monday through Friday, except when the
following holidays are celebrated: New Year's Day, Martin Luther King, Jr. Day
(the third Monday in January), Presidents' Day (the third Monday in February),
Good Friday, Memorial Day (the last Monday in May), Independence Day, Labor Day
(the first Monday in September), Thanksgiving Day (the fourth Thursday in
November)and Christmas Day.
--------------------------------------------------------------------------------
ORGANIZATIONAL STRUCTURE
Although the Fund has not currently retained the services of an investment
adviser or sub-advisor, it may do so in the future. Accordingly, SMC and the
Fund have received from the Securities and Exchange Commission an exemptive
order for a multi-manager structure that allows SMC to hire, replace or
terminate sub-advisors without the approval of shareholders. The order also
allows SMC to revise a sub-advisory agreement with the approval of Fund
Directors, but without shareholder approval. If a new sub-advisor is hired,
shareholders will receive information about the new sub-advisor within 90 days
of the change. The order allows the Fund to operate more efficiently and with
greater flexibility. Should the Fund use the service of a sub-advisor in the
future, SMC would anticipate providing the following oversight and evaluation
services to the Fund:
* performing initial due diligence on prospective sub-advisors for the Fund
* monitoring the performance of the sub-advisor(s)
* communicating performance expectations to the sub-advisor(s)
* ultimately recommending to the Board of Directors whether a sub-advisor's
contract should be renewed, modified or terminated.
SMC does not expect it would recommend frequent changes of sub-advisors.
The Fund is a "feeder fund" that invests all of its assets in a "master
portfolio," the PreservationPlus Income Portfolio. The Fund and the master
portfolio have the same investment objective. The master portfolio is advised by
Bankers Trust.
The master portfolio may accept investments from other feeder funds. The feeders
bear the master portfolio's expenses in proportion to their assets. Each feeder
can set its own transaction minimums, fund-specific expenses, and other
conditions. This arrangement allows the Fund's Directors to withdraw the Fund's
assets from the master portfolio if they believe doing so is in the
shareholders' best interests. If the Directors withdraw the Fund's assets, they
would then consider whether the Fund should hire its own investment adviser,
invest in a different master portfolio or take other action.
BUYING SHARES
Shares of the Fund are available through broker/dealers, banks, and other
financial intermediaries that have an agreement with the Fund's Distributor,
Security Distributors, Inc.
There are three different ways to buy shares of the Fund--Class A shares, Class
B shares or Class C shares. The different classes of a Fund differ primarily
with respect to the sales charges and Rule 12b-1 distribution fees to which they
are subject. The minimum initial investment is $100. Subsequent investments must
be $100 (or $20 under an Accumulation Plan). The Fund reserves the right to
reject any order to purchase shares.
CLASS A SHARES -- Class A shares are subject to a sales charge at the time of
purchase. An order for Class A shares will be priced at the Fund's net asset
value per share (NAV), plus the sales charge, set forth in the following table.
The NAV, plus the sales charge is the "offering price." The Fund's NAV is
generally calculated as of the close of trading on every day the New York Stock
Exchange is open. An order for Class A shares is priced at the NAV next
calculated after the order is accepted by the Fund, plus the sales charge.
--------------------------------------------------------------------------------
SALES CHARGE
--------------------------------------
APPLICABLE PERCENTAGE
AMOUNT OF PERCENTAGE OF NET PERCENTAGE
PURCHASE AT OF OFFERING AMOUNT REALLOWABLE
OFFERING PRICE PRICE INVESTED TO DEALERS
--------------------------------------------------------------------------------
Less than $100,000 ....................... 3.5% 3.63% 3.0%
$100,000 but less than $500,000 .......... 2.5% 2.56% 2.0%
$500,000 but less than $1,000,000 ........ 1.5% 1.52% 1.0%
$1,000,000 and over ...................... None None (See below)
--------------------------------------------------------------------------------
Please see Appendix A for options that are available for reducing the sales
charge applicable to purchases of Class A shares.
CLASS A DISTRIBUTION PLAN -- The Fund has adopted a Class A Distribution Plan
that allows the Fund to pay distribution fees to the Fund's Distributor. The
Distributor uses the fees to finance activities related to the sale of Class A
shares and services to shareholders. The distribution fee is equal to 0.25% of
the average daily net assets of the Fund's Class A shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
CLASS B SHARES -- Class B shares are not subject to a sales charge at the time
of purchase. An order for Class B shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class B shares are subject to a deferred sales charge if redeemed within 5 years
from the date of purchase. The deferred sales charge is a percentage of the NAV
of the shares at the time they are redeemed or the original purchase price,
whichever is less. Shares that are not subject to the deferred sales charge are
redeemed first. Then, shares held the longest will be the first to be redeemed.
The amount of the deferred sales charge is based upon the number of years since
the shares were purchased, as follows:
-------------------------------------
NUMBER OF YEARS DEFERRED
SINCE PURCHASE SALES CHARGE
-------------------------------------
1 ....................... 5%
2 ....................... 4%
3 ....................... 3%
4 ....................... 3%
5 ....................... 2%
6 and more .............. 0%
-------------------------------------
The Distributor will waive the deferred sales charge under certain
circumstances. See "Waiver of the Deferred Sales Charge," page 12.
CLASS B DISTRIBUTION PLAN -- The Fund has adopted a Class B Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class B
shares and services to shareholders. The distribution fee is equal to .75% of
the average daily net assets of the Fund's Class B shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
Class B shares automatically convert to Class A shares on the eighth anniversary
of purchase. This is advantageous to such shareholders because Class A shares
are subject to a lower distribution fee than Class B shares. A pro rata amount
of Class B shares purchased through the reinvestment of dividends or other
distributions is also converted to Class A shares each time that shares
purchased directly are converted.
CLASS C SHARES -- Class C shares are not subject to a sales charge at the time
of purchase. An order for Class C shares will be priced at the Fund's NAV next
calculated after the order is accepted by the Fund. The Fund's NAV is generally
calculated as of the close of trading on every day the New York Stock Exchange
is open.
Class C shares are subject to a deferred sales charge of 1.00% if redeemed
within one year from the date of purchase. The deferred sales charge is a
percentage of the NAV of the shares at the time they are redeemed or the
original purchase price, whichever is less. Shares that are not subject to the
deferred sales charge are redeemed first. Then, shares held the longest will be
the first to be redeemed. The Distributor will waive the deferred sales charge
under certain circumstances. See "Waiver of the Deferred Sales Charge," page 12.
CLASS C DISTRIBUTION PLAN -- The Fund has adopted a Class C Distribution Plan
that allows the Fund to pay distribution fees to the Distributor. The
Distributor uses the fees to finance activities related to the sale of Class C
shares and services to shareholders. The distribution fee is equal to .50% of
the average daily net assets of the Fund's Class C shares. Because the
distribution fees are paid out of the Fund's assets on an ongoing basis, over
time these fees will increase the cost of a shareholder's investment and may
cost an investor more than paying other types of sales charges.
WAIVER OF DEFERRED SALES CHARGE -- The Distributor will waive the deferred sales
charge under the following circumstances:
* Upon the death of the shareholder if shares are redeemed within one year of
the shareholder's death
* Upon the disability of the shareholder prior to age 65 if shares are redeemed
within one year of the shareholder becoming disabled and the shareholder was
not disabled when the shares were purchased
* In connection with required minimum distributions from a retirement plan
qualified under Section 401(a), 401(k), 403(b) or 408 of the Internal Revenue
Code
* In connection with distributions from retirement plans qualified under
Section 401(a) or 401(k) of the Internal Revenue Code for:
> returns of excess contributions to the plan
> retirement of a participant in the plan
> a loan from the plan (loan repayments are treated as new sales for
purposes of the deferred sales charge)
* Upon the financial hardship (as defined in regulations under the Code) of a
participant in a plan
* Upon termination of employment of a participant in a plan
* Upon any other permissible withdrawal under the terms of the plan
CONFIRMATIONS AND STATEMENTS -- The Fund will send you a confirmation statement
after every transaction that affects your account balance or registration.
However, certain automatic transactions may be confirmed on a quarterly basis
including systematic withdrawals, automatic purchases and reinvested dividends.
Each shareholder will receive a quarterly statement setting forth a summary of
the transactions that occurred during the preceding quarter.
SELLING SHARES
Selling your shares of a Fund is called a "redemption," because the Fund buys
back its shares. A shareholder may sell shares at any time. Shares will be
redeemed at the NAV next determined after the order is accepted by the Fund's
transfer agent, less any applicable (i) deferred sales charge and (ii)
redemption fee. A Fund's NAV is generally calculated as of the close of trading
on every day the New York Stock Exchange is open. Any share certificates
representing Fund shares being sold must be returned with a request to sell the
shares. The value of your shares at the time of redemption may be more or less
than their original cost. The Fund reserves the right to honor any request for
redemption by making payment in whole or in part in securities selected in the
sole discretion of the Fund. The redemption-in-kind will not include wrapper
agreements.
When redeeming recently purchased shares, if the Fund has not collected payment
for the shares, it may delay sending the proceeds until it has collected
payment, which may take up to 15 days.
When the Interest Rate Trigger is active, redemptions that are not Qualified TSA
Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions, as
described in the following sections, will be subject to a 3% redemption fee. It
is therefore important to consult with your professional tax advisor regarding
the terms, conditions and tax consequences of such withdrawals.
To sell your shares, send a letter of instruction that includes:
* The name and signature of the account owner(s)
* The name of the Fund
* The reason you are selling your shares
* The dollar amount or number of shares to sell
* Where to send the proceeds
* A signature guarantee if
> The check will be mailed to a payee or address different than that of the
account owner, or
> The sale of shares is more than $10,000.
--------------------------------------------------------------------------------
A SIGNATURE GUARANTEE helps protect against fraud. Banks, brokers, credit
unions, national securities exchanges and savings associations provide signature
guarantees. A notary public is not an eligible signature guarantor. For joint
accounts, both signatures must be guaranteed.
--------------------------------------------------------------------------------
Mail your request to:
Security Management Company, LLC
P.O. Box 750525
Topeka, KS 66675-9135
Signature requirements vary based on the type of account you
have:
* INDIVIDUAL OR JOINT TENANTS: Written instructions must be signed by an
individual shareholder, or in the case of joint accounts, all of the
shareholders, exactly as the name(s) appears on the account.
* UGMA OR UTMA: Written instructions must be signed by the custodian as it
appears on the account.
* SOLE PROPRIETOR OR GENERAL PARTNER: Written instructions must be signed by an
authorized individual as it appears on the account.
* CORPORATION OR ASSOCIATION: Written instructions must be signed by the
person(s) authorized to act on the account. A certified resolution dated
within six months of the date of receipt, authorizing the signer to act, must
accompany the request if not on file with the Fund.
* TRUST: Written instructions must be signed by the trustee(s). If the name of
the current trustee(s) does not appear on the account, a certified
certificate of incumbency dated within 60 days must also be submitted.
* RETIREMENT: Written instructions must be signed by the account owner.
INTEREST RATE TRIGGER -- Qualified TSA Redemptions, Qualified IRA Redemptions
and Qualified Plan Redemptions are not subject to the redemption fee at any
time. All other redemptions are subject to the redemption fee, in the amount of
3%, on the proceeds of such redemptions of shares by shareholders on any day
that the "Interest Rate Trigger" (as described below) is "active," and not
subject to those charges on days that the Interest Rate Trigger is "inactive."
The Interest Rate Trigger is active on any day when, as of the preceding day,
the "Reference Index Yield" exceeds the sum of the "Annual Effective Yield" of
the Portfolio's plus 1.35%. The Reference Index Yield on any determination date
is the previous day's closing "Yield to Worst" on the Lehman Brothers
Intermediate Treasury Bond Index(R). The "Annual Effective Yield" generally
represents one day's investment income expressed as an annualized yield and
compounded annually. The status of the Interest Rate Trigger will either be
"active" or "inactive" on any day, and shall be determined on every day that an
NAV is calculated for the Fund. Once the Interest Rate Trigger is active, it
remains active every day until the Reference Index Yield is less than the sum of
the Annual Effective Yield of the Portfolio plus 1.10%, at which time the
Interest Rate Trigger becomes inactive on the following day and remains inactive
every day thereafter until it becomes active again. An example of when and how
the redemption fee will apply to the redemption of shares follows.
--------------------------------------------------------------------------------
The Annual Effective Yield of the Portfolio is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. The
Annual Effective Yield of the Portfolio shall be expressed as a percentage and
calculated on each business day as follows based on the dividend declared for
the previous day:
[(1 + previous day's dividend factor)^365 - 1]
----------------------------------------------
NAV per share
Please note that the Annual Effective Yield of the Fund will be lower than the
annual effective yield of the Portfolio because the Portfolio's expenses are
lower than the Fund's.
--------------------------------------------------------------------------------
A shareholder is considering submitting a request for a redemption of Class A
shares other than a Qualified TSA Redemption, Qualified IRA Redemption or
Qualified Plan Redemption to the Fund on March 2 in the amount of $5,000. Assume
that the Reference Index Yield is 8.65% as of the close of business on March 1
and the Annual Effective Yield of the Portfolio is 6.20% as of that date. The
Annual Effective Yield of the Portfolio plus 1.35% equals 7.55%. Since this is
less than the Reference Index Yield of 8.65%, the Interest Rate Trigger is
active. Thus, the net redemption proceeds to the Shareholder will be $4,850. The
redemption fee will continue to apply to all redemptions which are not Qualified
TSA Redemptions, Qualified IRA Redemptions or Qualified Plan Redemptions until
the day after the Reference Index Yield is less than the sum of the Annual
Effective Yield of the Portfolio plus 1.10%. (Please note that this example does
not take into consideration an individual Shareholder's tax issues or
consequences including without limitation any withholding taxes that may apply.)
The spread between the Annual Effective Yield of the Portfolio and the Reference
Index Yield that cause the Interest Rate Trigger to be activated (currently a
spread of 1.35%) and de-activated (currently a spread of 1.10%) reflect the fact
that the Portfolio's entire investment advisory fee is currently being waived.
If the investment advisory fee waiver is discontinued as expected, these spreads
will increase.
The amount of, and method of applying, the Redemption Fee, including the
operation of the Interest Rate Trigger, may be changed in the future. For
example, we expect to reduce the Redemption Fee to 2% and correspondingly adjust
the Interest Rate Trigger so that the Interest Rate Trigger will be active more
frequently than under the current calculation. Shares currently offered in this
prospectus would be subject to the new combination of Redemption Fee and
Interest Rate Trigger.
Shareholders can obtain information regarding when the Interest Rate Trigger is
active, as well as the Annual Effective Yield of the Portfolio and the Reference
Index Yield by calling 1-800-888-2461. The amount of, and method of applying,
the redemption fee, including the operation of the Interest Rate Trigger, may be
changed in the future.
QUALIFIED TSA REDEMPTIONS -- A redemption of Fund shares can be made at any time
without the assessment of a redemption fee if the redemption is a "Qualified TSA
Redemption." In general, amounts distributed to a taxpayer from a TSA account
prior to the date on which the taxpayer reaches age 59 1/2 are includible in the
taxpayer's gross income and, unless the distribution meets the requirements of a
specific exception under the tax code, are also subject to an early withdrawal
penalty tax. A "Qualified TSA Redemption" is:
* a redemption made by an owner of a TSA account that is not subject to the
early withdrawal penalty tax, provided however, that a rollover from a TSA
account to an IRA account, or a direct trustee-to-trustee transfer of a TSA
account is not a Qualified TSA Redemption unless the owner of the TSA account
or IRA account continues the investment of the transferred amount in the
Fund;
* a transfer to another investment option that is not a competing fund* in your
TSA account if:
> your TSA account does not allow transfers to competing funds or
> your TSA account requires transfers between the Fund and a non-competing
fund to remain in the non-competing fund for a period of at least three
months before being transferred to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 3% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your account allows transfers
to competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
Owners of TSA accounts requesting a redemption of Fund shares will be required
to provide a written statement as to whether the proceeds of the redemption will
be subject to the early withdrawal penalty tax and to identify the specific
exception upon which he or she intends to rely. The information relating to the
early withdrawal penalty tax will form the basis for determining whether a
redemption is a Qualified TSA Redemption. The Fund or the Fund's Administrator
may require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to early withdrawal penalty tax. With respect to a transfer, the owner may be
required to provide evidence that the transfer is not to a competing fund.
QUALIFIED IRA REDEMPTIONS -- A redemption of Fund shares can be made at any time
without the assessment of a redemption fee if the redemption is a "Qualified IRA
Redemption." In general, amounts distributed to a taxpayer from an IRA account
prior to the date on which the taxpayer reaches age 59 1/2 are includible in the
taxpayer's gross income and, unless the distribution meets the requirements of a
specific exception under the tax code, are also subject to an early withdrawal
penalty tax. A "Qualified IRA Redemption" is a redemption made by an owner of an
IRA account that is not subject to the early withdrawal penalty tax, provided
however, that an IRA rollover, or a direct trustee-to-trustee transfer of an IRA
is not a Qualified IRA Redemption unless the owner of the IRA account continues
the investment of the transferred amount in the Fund.
Owners of IRA accounts requesting a redemption of Fund shares will be required
to provide a written statement as to whether the proceeds of the redemption will
be subject to the early withdrawal penalty tax and to identify the specific
exception upon which he or she intends to rely. This information will form the
basis for determining whether a redemption is a Qualified IRA Redemption. The
Fund or the Fund's Administrator may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to early withdrawal penalty tax.
QUALIFIED PLAN REDEMPTIONS -- Your plan administrator should be contacted for
information on how to redeem shares. There will be no redemption fee assessed
for qualified plan redemptions, which are:
* Redemptions resulting from the plan participant's death, disability,
retirement or termination of employment;
* Redemptions to fund loans to, or "in service" withdrawals by, a plan
participant; and
* Transfers to other plan investment options that are not competing funds* if:
> your plan does not allow transfers to competing funds or
> your plan requires transfers between the Fund and a non-competing fund to
remain in the non-competing fund for a period of at least three months
before transfer to a competing fund.
*Competing funds are any fixed income investment options with a targeted average
duration of three years or less, or any investment option that seeks to
maintain a stable value per unit or share, including money market funds.
All other redemptions of shares will be subject to the 3% redemption fee, if the
Interest Rate Trigger is active. Specifically, if your plan allows transfers to
competing funds or if they do not require transfers between the Fund and a
non-competing fund to remain in the non-competing fund for a period of at least
three months before transfer to a competing fund, all transfers will be subject
to a redemption fee.
The Fund reserves the right to require written verification of whether a
redemption request is for a Qualified Plan Redemption in accordance with plan
provisions and to establish the authenticity of this information before
processing a redemption request.
PAYMENT OF REDEMPTION PROCEEDS -- Payments may be made by check.
The Fund may suspend the right of redemption during any period when trading on
the New York Stock Exchange is restricted or such Exchange is closed for other
than weekends or holidays, or any emergency is deemed to exist by the Securities
and Exchange Commission.
BY CHECK. Redemption proceeds will be sent to the shareholder(s) of record at
the address on our records generally within seven days after receipt of a valid
redemption request. For a charge of $15 deducted from redemption proceeds, the
Administrator will provide a certified or cashier's check, or send the
redemption proceeds by express mail, upon the shareholder's request.
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends from its net income daily and pays the dividends on
a monthly basis.
The Fund reserves the right to include in the daily dividend any short-term
capital gains on securities that it sells. Also, the Fund will normally declare
and pay annually any long-term capital gains as well as any short-term capital
gains that it did not distribute during the year.
On occasion, the dividends the Fund distributes may differ from the income the
Fund earns. When the Fund's income exceeds the amount distributed to
shareholders, the Fund may make an additional distribution. When an additional
distribution is necessary, the Board of Directors may declare a REVERSE STOCK
SPLIT to occur at the same time the additional distribution is made. Making the
additional distribution simultaneously with the reverse stock split will
minimize fluctuations in the net asset value of the Fund's shares.
All dividends and capital gains, if any, will automatically be reinvested unless
you notify the Fund otherwise.
--------------------------------------------------------------------------------
A REVERSE STOCK SPLIT reduces the number of total shares the Fund has
outstanding. The market value of the shares will be the same after the stock
split as before the split, but each share will be worth more.
--------------------------------------------------------------------------------
TAX CONSIDERATIONS
The Fund does not ordinarily pay income taxes. You and other shareholders pay
taxes on the income or capital gains from the Fund's holdings.
For TSA owners, IRA owners and Plan participants utilizing the Fund as an
investment option under their Plan, dividend and capital gain distributions from
the Fund generally will not be subject to current taxation, but will accumulate
on a tax-deferred basis.
Because each participant's tax circumstances are unique and because the tax laws
governing Plans are complex and subject to change, it is recommended that you
consult your Plan administrator, your plan's Summary Plan Description, and/or
your tax advisor about the tax consequences of your participation in your Plan
and of any Plan contributions or withdrawals.
SHAREHOLDER SERVICES
ACCUMULATION PLAN -- An investor may choose to invest in the Fund through a
voluntary Accumulation Plan. This allows for an initial investment of $100
minimum and subsequent investments of $20 minimum at any time. An Accumulation
Plan involves no obligation to make periodic investments, and is terminable at
will.
Payments are made by sending a check to the Distributor who (acting as an agent
for the dealer) will purchase whole and fractional shares of the Fund as of the
close of business on such day as the payment is received. The investor will
receive a confirmation and statement after each investment.
Investors may also choose to use "Secur-O-Matic" (automatic bank draft) to make
Fund purchases. There is no additional charge for choosing to use Secur-O-Matic.
Withdrawals from your bank account may occur up to 3 business days before the
date scheduled to purchase Fund shares. An application for Secur-O-Matic may be
obtained from the Fund.
SYSTEMATIC WITHDRAWAL PROGRAM -- Shareholders who wish to receive regular
monthly, quarterly, semiannual, or annual payments of $25 or more may establish
a Systematic Withdrawal Program. A shareholder may elect a payment that is a
specified percentage of the initial or current account value or a specified
dollar amount. A Systematic Withdrawal Program will be allowed only if shares
with a current aggregate net asset value of $5,000 or more are deposited with
the Administrator, which will act as agent for the shareholder under the
Program. Shares are liquidated at net asset value less any applicable Redemption
Fee. The Program may be terminated on written notice, or it will terminate
automatically if all shares are liquidated or redeemed from the account.
A shareholder may establish a Systematic Withdrawal Program with respect to
Class B and Class C shares without the imposition of any applicable contingent
deferred sales charge, provided that such withdrawals do not in any 12-month
period, beginning on the date the Program is established, exceed 10% of the
value of the account on that date ("Free Systematic Withdrawals"). Free
Systematic Withdrawals are not available if a Program established with respect
to Class B or Class C shares provides for withdrawals in excess of 10% of the
value of the account in any Program year and, as a result, all withdrawals under
such a Program would be subject to any applicable contingent deferred sales
charge. Free Systematic Withdrawals will be made first by redeeming those shares
that are not subject to the contingent deferred sales charge and then by
redeeming shares held the longest. The contingent deferred sales charge
applicable to a redemption of Class B or Class C shares requested while Free
Systematic Withdrawals are being made will be calculated as described under
"Waiver of Deferred Sales Charge," page 12. A Systematic Withdrawal form may be
obtained from the Fund.
EXCHANGE PRIVILEGE -- Shareholders who own shares of the Fund may exchange those
shares for shares of the Diversified Income or High Yield series of Security
Income Fund or for shares of other mutual funds distributed by the Distributor
(the "Security Funds"). Shareholders, except those who have purchased through
the following custodial accounts of the Administrator, 403(b)(7) accounts, SEPP
accounts and SIMPLE Plans, may also exchange their shares for shares of Cash
Fund. Exchanges may be made, only in those states where shares of the fund into
which an exchange is to be made are qualified for sale. No service fee is
presently imposed on such an exchange. Class A, Class B and Class C shares of
the Fund may be exchanged for Class A, Class B and, if applicable, Class C
shares, respectively, of another Security Fund. A Redemption Fee may be assessed
on an exchange from the Fund to another Security Fund if the Interest Rate
Trigger is active. Any applicable contingent deferred sales charge will be
calculated from the date of the initial purchase.
Exchanges of Class A shares from the Fund are made at net asset value without a
front-end sales charge if (1) the shares have been owned for at least 90
consecutive days prior to the exchange, (2) the shares were acquired pursuant to
a prior exchange from a Security Fund which assessed a sales charge on the
original purchase, or (3) the shares were acquired as a result of the
reinvestment of dividends or capital gains distributions. Exchanges of Class A
shares from the Fund, other than those described above, are made at net asset
value plus the sales charge described in the prospectus of the other Security
Fund being acquired, less the sales charge paid on the shares of the Fund at the
time of original purchase.
Shareholders should contact the Fund before requesting an exchange in order to
ascertain whether any sales charges are applicable to the shares to be
exchanged. In effecting the exchanges of Fund shares, the Administrator will
first cause to be exchanged those shares which would not be subject to any sales
charges. The terms of an employee-sponsored retirement plan may affect a
shareholder's right to exchange shares as described above. Contact your plan
sponsor or administrator to determine if all of the exchange options discussed
above are available under your plan.
For tax purposes, an exchange is a sale of shares which may result in a taxable
gain or loss. Special rules may apply to determine the amount of gain or loss on
an exchange occurring within ninety days after the exchanged shares were
acquired.
Exchanges are made upon receipt of a properly completed Exchange Authorization
form. This privilege may be changed or discontinued at any time at the
discretion of the management of the Fund upon 60 days' notice to shareholders. A
current prospectus of the Security Fund into which an exchange is made will be
given to each shareholder exercising this privilege.
DOLLAR COST AVERAGING. Only for shareholders of a TSA account sponsored by the
Administrator and opened on or after June 5, 2000, a special exchange privilege
is available. This privilege allows such shareholders to make periodic exchanges
of shares from the Fund (held in non-certificate form) to one or more of the
funds available under the exchange privilege as described above. Such periodic
exchanges in which securities are purchased at regular intervals are known as
"dollar cost averaging." With dollar cost averaging, the cost of the securities
gets averaged over time and possibly over various market cycles. Dollar cost
averaging does not guarantee profits, nor does it assure that you will not have
losses.
You may obtain a dollar cost averaging request form from the Administrator. You
must designate on the form whether amounts are to be exchanged on the basis of a
specific dollar amount or a specific number of shares. The Administrator will
exchange shares as requested on the first business day of the month. The
Administrator will make exchanges until your account value in the Fund is
depleted or until you instruct the Administrator to terminate dollar cost
averaging. You may instruct the Administrator to terminate dollar cost averaging
at any time by written request.
ASSET REBALANCING. Only for shareholders of a TSA account sponsored by the
Administrator and opened on or after June 5, 2000, a special exchange privilege
is available that allows shareholders to automatically exchange shares of the
funds on a quarterly basis to maintain a particular percentage allocation among
the funds. The available funds are those discussed above under the exchange
privilege and shares of such funds must be held in non-certificate form. Your
account value allocated to a fund will grow or decline in value at different
rates during the selected period, and asset rebalancing will automatically
reallocate your account value in the funds to the allocation you select on a
quarterly basis.
You may obtain an asset rebalancing request form from the Administrator. You
must designate on the form the applicable funds and the percentage of account
value to be maintained in each fund. Thereafter, the Administrator will exchange
shares of the funds to maintain that allocation on the first business day of
each calendar quarter. You may instruct the Administrator to terminate asset
rebalancing at any time by written request.
RETIREMENT PLANS -- The Fund has available tax-qualified retirement plans for
individuals, prototype plans for the self-employed, pension and profit sharing
plans for corporations and custodial accounts for employees of public school
systems and organizations meeting the requirements of Section 501(c)(3) of the
Internal Revenue Code. Further information concerning these plans is contained
in the Fund's Statement of Additional Information.
GENERAL INFORMATION
SHAREHOLDER INQUIRIES -- Shareholders who have questions concerning their
account or wish to obtain additional information, may call the Fund (see back
cover for address and telephone numbers), or contact their securities dealer.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for its Class A shares, Class B shares and Class C Shares
for the period May 3, 1999 to September 30, 1999. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund assuming reinvestment of all dividends and distributions. This
information has been audited by Ernst & Young LLP, whose report, along with the
Fund's financial statements, is included in the annual report which is available
upon request.
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS A)
--------------------------------------------------------------------------------
1999(A)(D)
PER SHARE DATA
Net asset value beginning of period.......................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.22
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income........................................ (0.22)
-----
Net asset value end of period................................ $10.00
=====
Total investment return(b)................................... 2.24%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)......................... $25,261
Ratio of net investment income to average net assets......... 6.16%
Ratio of expenses to average net assets(c)................... 1.26%
Decrease reflected in the above expense ratio due to
absorption of expenses by Bankers Trust................... 0.92%
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS B)
--------------------------------------------------------------------------------
1999(A)(D)
PER SHARE DATA
Net asset value beginning of period.......................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.20
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income........................................ (0.20)
-----
Net asset value end of period................................ $10.00
=====
Total investment return(b)................................... 2.03%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)......................... $324
Ratio of net investment income to average net assets......... 5.27%
Ratio of expenses to average net assets(c)................... 1.89%
Decrease reflected in the above expense ratio due to
absorption of expenses by Bankers Trust................... 0.92%
--------------------------------------------------------------------------------
SECURITY CAPITAL PRESERVATION FUND (CLASS C)
--------------------------------------------------------------------------------
1999(A)(D)
PER SHARE DATA
Net asset value beginning of period.......................... $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income........................................ 0.21
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income........................................ (0.21)
-----
Net asset value end of period................................ $10.00
=====
Total investment return(b)................................... 2.12%
RATIOS/SUPPLEMENTAL DATA
Net assets end of period (thousands)......................... $194
Ratio of net investment income to average net assets......... 5.51%
Ratio of expenses to average net assets(c)................... 1.64%
Decrease reflected in the above expense ratio due to
absorption of expenses by Bankers Trust................... 0.92%
--------------------------------------------------------------------------------
(a) Security Capital Preservation Fund Class A, B and C shares were initially
capitalized on May 3, 1999, with a net asset value of $10 per share.
Amounts presented are for the period May 3, 1999 through September 30,
1999. Percentage amounts, except for total return, have been annualized.
(b) Total return information does not reflect deduction of any sales charges
imposed at the time of purchase for Class A shares or upon redemption for
Class B and C shares. Total returns for the Fund assume that an investor
did not pay a redemption fee at the end of the periods shown.
(c) Ratio expenses to average net assets include expenses of the
PreservationPlus Income Portfolio.
(d) Net investment income was computed using average month-end shares
outstanding.
--------------------------------------------------------------------------------
<PAGE>
APPENDIX A
--------------------------------------------------------------------------------
REDUCED SALES CHARGES
CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Fund alone or in combination
with Class A shares of other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation or a Statement of Intention, the term "Purchaser"
includes the following persons: an individual, his or her spouse and children
under the age of 21; a trustee or other fiduciary of a single trust estate or
single fiduciary account established for their benefit; an organization exempt
from federal income tax under Section 501(c)(3) or (13) of the Internal Revenue
Code; or a pension, profit-sharing or other employee benefit plan whether or not
qualified under Section 401 of the Internal Revenue Code.
RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Class A shares
of the Fund, a Purchaser may combine all previous purchases of the Fund with a
contemplated current purchase and receive the reduced applicable front-end sales
charge. The Distributor must be notified when a sale takes place which might
qualify for the reduced charge on the basis of previous purchases.
Rights of accumulation also apply to purchases representing a combination of the
Class A shares of the Fund, and other Security Funds, except Security Cash Fund,
in those states where shares of the fund being purchased are qualified for sale.
STATEMENT OF INTENTION -- A Purchaser may choose to sign a Statement of
Intention within 90 days after the first purchase to be included thereunder,
which will cover future purchases of Class A shares of the Fund, and other
Security Funds, except Security Cash Fund. The amount of these future purchases
shall be specified and must be made within a 13-month period (or 36-month period
for purchases of $1 million or more) to become eligible for the reduced
front-end sales charge applicable to the actual amount purchased under the
Statement. Shares equal to five percent (5%) of the amount specified in the
Statement of Intention will be held in escrow until the statement is completed
or terminated. These shares may be redeemed by the Fund if the Purchaser is
required to pay additional sales charges.
A Statement of Intention may be revised during the 13-month (or, if applicable,
36-month) period. Additional Class A shares received from reinvestment of income
dividends and capital gains distributions are included in the total amount used
to determine reduced sales charges. A Statement of Intention may be obtained
from the Fund.
REINSTATEMENT PRIVILEGE -- Shareholders who redeem their Class A shares of the
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
Class A shares without a sales charge up to the dollar amount of the redemption
proceeds; or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Security
Funds, without a sales charge up to the dollar amount of the redemption
proceeds. To exercise this privilege, a shareholder must provide written notice
and a check in the amount of the reinvestment within thirty days after the
redemption request; the reinstatement will be made at the net asset value per
share on the date received by the Fund or the Security Funds, as appropriate.
<PAGE>
FOR MORE INFORMATION
--------------------------------------------------------------------------------
BY TELEPHONE -- Call 1-800-888-2461.
BY MAIL -- Write to:
Security Management Company, LLC
700 SW Harrison
Topeka, KS 66636-0001
ON THE INTERNET -- Reports and other information about the Fund can be viewed
online or downloaded from:
SEC: On the EDGAR Database at http://www.sec.gov
SMC, LLC: http://www.securitybenefit.com
Additional information about the Fund (including the Statement of Additional
Information) can be reviewed and copied at the Securities and Exchange
Commission's Public Reference Room in Washington, DC. Information about the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090. Copies may be obtained, upon payment of a duplicating fee, by
electronic request at the following e-mail address: [email protected] or by
writing the Public Reference Section of the Commission, Washington, DC
20549-0102.
--------------------------------------------------------------------------------
ANNUAL/SEMI-ANNUAL REPORT -- Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of the market conditions
and investment strategies that significantly affected the Fund's performance
during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION -- The Fund's Statement of Additional
Information and the Fund's annual or semi-annual report are available, without
charge upon request by calling the Funds' toll-free telephone number
1-800-888-2461, extension 3127. Shareholder inquiries should be addressed to
SMC, LLC, 700 SW Harrison Street, Topeka, Kansas 66636-0001, or by calling the
Fund's toll-free telephone number listed above. The Fund's Statement of
Additional Information is incorporated into this prospectus by reference.
The Fund's Investment Company Act file number is listed below:
Security Income Fund............. 811-2120
<PAGE>
SECURITY INCOME FUND
* DIVERSIFIED INCOME SERIES
(formerly U.S. Government Series)
* HIGH YIELD SERIES
SECURITY MUNICIPAL BOND FUND
SECURITY CASH FUND
Members of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
(785) 431-3127
(800) 888-2461
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus dated May 1, 2000, as it may be supplemented
from time to time. A Prospectus may be obtained by writing Security
Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling
(785) 431-3127 or (800) 888-2461, ext. 3127. The Fund's December 31, 1999 Annual
Report is incorporated herein by reference.
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 2000, AS SUPPLEMENTED JULY 26, 2000
RELATING TO THE PROSPECTUS DATED May 1, 2000,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
--------------------------------------------------------------------------------
INVESTMENT MANAGER
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City Missouri, 64105-2143
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
GENERAL INFORMATION......................................................... 3
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS............................. 4
Security Income Fund..................................................... 4
Security Municipal Bond Fund............................................. 7
Security Cash Fund....................................................... 11
INVESTMENT METHODS AND RISK FACTORS......................................... 13
General Risk Factors..................................................... 13
Repurchase Agreements, Reverse Repurchase Agreements
and Roll Transactions................................................. 13
Borrowing................................................................ 14
Lending of Portfolio Securities.......................................... 14
Guaranteed Investment Contracts ("GICs")................................. 14
Restricted Securities (Rule 144A Securities)............................. 14
Risks Associated With Lower-Rated Debt Securities (Junk Bonds)........... 15
Convertible Securities and Warrants...................................... 16
Mortgage Backed Securities and Collateralized Mortgage Obligations....... 16
Asset Backed Securities.................................................. 17
Real Estate Securities................................................... 17
When Issued and Forward Commitment Securities............................ 18
Options and Futures Strategies........................................... 18
Interest Rate Swaps...................................................... 22
Emerging Countries....................................................... 23
Foreign Investment Restrictions.......................................... 23
Political and Economic Risks............................................. 23
Religious and Ethnic Instability......................................... 23
Non-Uniform Corporate Disclosure Standards and Governmental Regulation... 23
Adverse Market Characteristics........................................... 24
Non-U.S. Withholding Taxes............................................... 24
Costs.................................................................... 24
Eastern Europe........................................................... 24
American Depositary Receipts (ADRs)...................................... 24
INVESTMENT POLICY LIMITATIONS............................................... 24
Fundamental Policies..................................................... 25
Operating Policies....................................................... 25
OFFICERS AND DIRECTORS...................................................... 26
REMUNERATION OF DIRECTORS AND OTHERS........................................ 27
PRINCIPAL HOLDERS OF SECURITIES............................................. 28
HOW TO PURCHASE SHARES...................................................... 28
Diversified Income, High Yield and Municipal Bond Funds.................. 29
Alternative Purchase Options............................................. 29
Class A Shares........................................................... 29
Security Income and Municipal Bond Funds' Class A Distribution Plans..... 29
Class B Shares........................................................... 30
Class B Distribution Plan................................................ 31
Class C Shares........................................................... 31
Class C Distribution Plan................................................ 31
Calculation and Waiver of Contingent Deferred Sales Charges.............. 32
Arrangements With Broker/Dealers and Others.............................. 32
Cash Fund................................................................ 33
PURCHASES AT NET ASSET VALUE................................................ 33
ACCUMULATION PLAN........................................................... 34
SYSTEMATIC WITHDRAWAL PROGRAM............................................... 34
INVESTMENT MANAGEMENT....................................................... 35
Portfolio Management..................................................... 37
Code of Ethics........................................................... 38
DISTRIBUTOR................................................................. 38
ALLOCATION OF PORTFOLIO BROKERAGE........................................... 39
DETERMINATION OF NET ASSET VALUE............................................ 40
HOW TO REDEEM SHARES........................................................ 41
Telephone Redemptions.................................................... 42
HOW TO EXCHANGE SHARES...................................................... 42
Exchange by Telephone.................................................... 43
DIVIDENDS AND TAXES......................................................... 44
Options, Futures and Forward Contracts and Swap Agreements............... 47
Market Discount.......................................................... 47
Original Issue Discount.................................................. 47
Constructive Sales....................................................... 48
Foreign Taxation......................................................... 48
Other Taxes.............................................................. 48
ORGANIZATION................................................................ 48
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT......................... 49
INDEPENDENT AUDITORS........................................................ 49
PERFORMANCE INFORMATION..................................................... 49
RETIREMENT PLANS............................................................ 50
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)....................................... 51
ROTH IRAS................................................................... 52
EDUCATION IRAS.............................................................. 52
SIMPLE IRAS................................................................. 52
PENSION AND PROFIT-SHARING PLANS............................................ 52
403(B) RETIREMENT PLANS..................................................... 52
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)................................... 53
FINANCIAL STATEMENTS........................................................ 53
TAX-EXEMPT VS. TAXABLE INCOME............................................... 53
APPENDIX A.................................................................. 54
--------------------------------------------------------------------------------
<PAGE>
GENERAL INFORMATION
Security Income Fund, Security Municipal Bond Fund and Security Cash Fund, which
were organized as Kansas corporations on April 20, 1965, July 14, 1981 and March
21, 1980, respectively, are registered with the Securities and Exchange
Commission as investment companies. The name of Security Municipal Bond Fund
(formerly "Security Tax-Exempt Fund") was changed effective May 1, 1998 that of
Diversified Income Series (formerly "U.S. Government Series") was changed
effective February 4, 2000. Such registration does not involve supervision by
the Securities and Exchange Commission of the management or policies of the
Funds. The Funds are diversified, open-end management investment companies that,
upon the demand of the investor, must redeem their shares and pay the investor
the current net asset value thereof. (See "How to Redeem Shares," page 41.)
Each of the Diversified Income Series ("Diversified Income Fund") and High Yield
Series ("High Yield Fund") of Security Income Fund, Security Municipal Bond Fund
("Municipal Bond Fund"), and Security Cash Fund ("Cash Fund") (the "Funds") has
its own investment objective and policies which are described below. While there
is no present intention to do so, the investment objective and policies of each
Fund, unless otherwise noted, may be changed by its Board of Directors without
the approval of stockholders. Each of the Funds is also required to operate
within limitations imposed by its fundamental investment policies which may not
be changed without stockholder approval. These limitations are set forth below
under "Investment Policy Limitations," page 24. An investment in one of the
Funds does not constitute a complete investment program.
The value of the shares of each Fund fluctuates with the value of the portfolio
securities. Each Fund may realize losses or gains when it sells portfolio
securities and will earn income to the extent that it receives dividends or
interest from its investments. (See "Dividends and Taxes," page 44.)
The shares of Diversified Income Fund and High Yield Fund are sold to the public
at net asset value, plus a sales commission which is divided between the
principal distributor and dealers who sell the shares ("Class A shares"), or at
net asset value with a contingent deferred sales charge ("Class B shares" or
"Class C shares"). The shares of Municipal Bond Fund are sold to the public at
net asset value, plus a sales commission which is divided between the principal
distributor and dealers who sell the shares ("Class A shares"), or at net asset
value with a contingent deferred sales charge ("Class B shares"). The shares of
Cash Fund are sold to the public at net asset value. There is no sales charge or
load when purchasing shares of Cash Fund. (See "How to Purchase Shares," page
28.)
The Funds receive investment advisory, administrative, accounting, and transfer
agency services from Security Management Company, LLC (the "Investment Manager")
for a fee. The Investment Manager has agreed that the aggregate annual expenses
(including the management compensation but excluding brokerage commissions,
interest, taxes, extraordinary expenses and Class B distribution fees) shall not
for Diversified Income and High Yield Funds exceed any expense limitation
imposed by any state and shall not for Cash Fund exceed 1% of the average net
assets of the Fund for the year. The Investment Manager has also agreed that the
aggregate annual expenses (including the management compensation but excluding
interest, taxes, extraordinary expenses and Class A and Class B distribution
fees) shall not for Municipal Bond Fund exceed 1% of the average net assets of
the Fund for the year. (See page 35 for a discussion of the Investment Manager
and the Investment Advisory Contract.)
Each Fund will pay all of its expenses not assumed by the Investment Manager or
Security Distributors, Inc. (the "Distributor") including organization expenses;
directors' fees; fees of custodian; taxes and governmental fees; interest
charges; any membership dues; brokerage commissions; expenses of preparing and
distributing reports to stockholders; costs of stockholder and other meetings;
and legal, auditing and accounting expenses. Each Fund will also pay for the
preparation and distribution of the prospectus to its stockholders and all
expenses in connection with its registration under the Investment Company Act of
1940 and the registration of its capital stock under federal and state
securities laws. Each Fund will pay nonrecurring expenses as may arise,
including litigation expenses affecting it.
Under Distribution Plans adopted with respect to the Class A shares of
Diversified Income, High Yield and Municipal Bond Funds pursuant to Rule 12b-1
under the Investment Company Act of 1940 (the "1940 Act"), these Funds are
authorized to pay to the Distributor, an annual fee of .25% of the average daily
net assets of the Class A shares of the Diversified Income, High Yield and
Municipal Bond Funds to finance various distribution-related activities. (See
"Security Income and Municipal Bond Funds' Class A Distribution Plans," page
29.)
Under Distribution Plans adopted with respect to the Class B shares of
Diversified Income, High Yield and Municipal Bond Funds pursuant to Rule 12b-1
under the 1940 Act, each Fund is authorized to pay to the Distributor, an annual
fee of 1.00% of the average daily net assets of the Class B shares of the
respective Funds to finance various distribution-related activities.
Under a Distribution Plan adopted with respect to the Class C shares of
Diversified Income and High Yield Funds pursuant to Rule 12b-1 under the 1940
Act, each Fund is authorized to pay to the Distributor, an annual fee of 1.00%
of the average daily net assets of the Class C shares of the respective Funds to
finance various distribution-related activities. (See "Class B Distribution
Plan," page 31, "Class C Distribution Plan, page 31.)
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
SECURITY INCOME FUND -- Security Income Fund ("Income Fund") offers its shares
in multiple Series, each of which represents a different investment objective
and which has its own identified assets and net asset values. The investment
objectives of the Diversified Income and High Yield Series of Income Fund are
each described below. There are risks inherent in the ownership of any security
and there can be no assurance that such investment objectives will be achieved.
Some of the risks are described below.
Short-term obligations may be purchased in any amount as the Investment Manager
deems appropriate for defensive or liquidity purposes. Each Fund's portfolio may
include a significant amount of debt securities that sell at discounts from
their face amount as a result of current market conditions. For example, debt
securities with fixed-rate coupons are generally sold at a discount from their
face amount during periods of rising interest rates.
Income Fund makes no representation that the stated investment objective of any
Series will be achieved. Although there is no present intention to do so, the
investment objective of any Series of the Fund may be altered by the Board of
Directors without the approval of stockholders of the Series.
DIVERSIFIED INCOME FUND. The investment objective of the Diversified Income Fund
is to provide a high level of interest income with security of principal. In
pursuing its investment objective, the Fund will invest in a broad range of debt
securities, including (i) securities issued by U.S. and Canadian corporations;
(ii) securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities, including Treasury bills, certificates of
indebtedness, notes and bonds; (iii) securities issued or guaranteed by the
Dominion of Canada or provinces thereof; (iv) securities issued by foreign
governments, their agencies and instrumentalities, and foreign corporations,
provided that such securities are denominated in U.S. dollars; (v) higher
yielding, high risk debt securities (commonly referred to as "junk bonds"); (vi)
certificates of deposit issued by a U.S. branch of a foreign bank ("Yankee
CDs"); (vii) investment grade mortgage-backed securities ("MBSs"); (viii)
investment grade asset-backed securities; (ix) zero coupon securities; and (x)
interest rate and total return swap agreements. High yield debt securities,
Yankee CDs, MBSs, asset-backed securities and swap agreements are described in
further detail under "Investment Methods and Risk Factors." It is anticipated
that the Fund will maintain a dollar weighted average duration of 4 to 10 years.
Diversified Income Fund may also invest a portion of its assets in options and
futures contracts. These instruments may be used to hedge the Fund's portfolio,
enhance income, or as a substitute for purchasing or selling securities.
Diversified Income Fund will invest primarily in debt securities rated Baa or
higher by Moody's or BBB or higher by S&P at the time of purchase, or if
unrated, of equivalent quality as determined by the Investment Manager. Baa
securities are considered to be "medium grade" obligations by Moody's and BBB is
the lowest classification which is still considered an "investment grade" rating
by S&P. Included in such securities may be convertible bonds or bonds with
warrants attached which are rated at least Baa or BBB at the time of purchase,
or if unrated, of equivalent quality as determined by the Investment Manager. A
"convertible bond" is a bond, debenture or preferred share which may be
exchanged by the owner for common stock or another security, usually of the same
company, in accordance with the terms of the issue. A "warrant" confers upon its
holder the right to purchase an amount of securities at a particular time and
price. Bonds rated Baa by Moody's or BBB by S&P have speculative characteristics
and may be more susceptible than higher grade bonds to adverse economic
conditions or other adverse circumstances which may result in a weakened
capacity to make principal and interest payments. See Appendix A to the
Prospectus for a description of corporate bond ratings.
The Fund may invest in higher yielding debt securities in the lower rating
(higher risk) categories of the recognized rating services (commonly referred to
as "junk bonds"); however, the Fund will never hold more than 25% of its net
assets in junk bonds, which includes securities rated Ba or lower by Moody's or
BB or lower by S&P. Such bonds are regarded as predominantly speculative with
respect to the ability of the issuer to meet principal and interest payments.
The Fund will not invest in junk bonds which are in default at the time of
purchase. However, the Investment Manager will not rely principally on the
ratings assigned by the rating services. Because the Fund may invest in lower
rated or unrated securities of comparable quality, the achievement of the Fund's
investment objective may be more dependent on the Investment Manager's own
credit analysis than would be true if investing in higher rated securities.
The Fund may purchase securities which are obligations of, or guaranteed by, the
Dominion of Canada or provinces thereof and debt securities issued by Canadian
corporations. Canadian securities will not be purchased if subject to the
foreign interest equalization tax and unless payable in U.S. currency.
The Fund may invest in Yankee CDs which are Certificates of Deposit issued by a
U.S. branch of a foreign bank denominated in U.S. dollars and held in the United
States. Yankee CDs are subject to somewhat different risks than are the
obligations of domestic banks. The Fund may also invest up to 25% of its net
assets in debt securities issued by foreign governments, their agencies and
instrumentalities, and foreign corporations, provided that such securities are
denominated in U.S. dollars. The Fund's investment in foreign securities,
including Canadian securities, will not exceed 25% of the Fund's net assets.
Investment in securities of foreign issuers presents certain risks, including
future political and economic developments and the possible imposition of
foreign governmental laws and restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers.
The Fund may invest in U.S. Government securities. Some U.S. Government
securities, such as Treasury bills and bonds, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others such as those of
the Student Loan Marketing Association, are supported only by the credit of the
instrumentality. U.S. Government securities include bills, certificates of
indebtedness, notes and bonds issued by the Treasury or by agencies or
instrumentalities of the U.S. Government. The Fund may also invest in zero
coupon securities which are debt securities that pay no cash income but are sold
at substantial discounts from their face value. Certain zero coupon securities
also provide for the commencement of regular interest payments at a deferred
date.
Diversified Income Fund may invest not more than 10% of its total assets in
securities which are restricted as to disposition under the federal securities
laws. The Fund may purchase without regard to this limitation restricted
securities which are eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities"), subject to the Fund's policy
that not more than 15% of its net assets may be invested in illiquid securities.
See "Investment Methods and Risk Factors" for a discussion of Rule 144A
Securities.
The Fund may invest without limit in MBSs, including mortgage pass-through
securities and collateralized mortgage obligations (CMOs). The Fund may invest
up to 10% of its net assets in securities known as "inverse floating
obligations," "residual interest bonds," or "interest-only" (IO) and
"principal-only" (PO) bonds, the market values of which will generally be more
volatile than the market values of most MBSs.
The Fund may also invest without limit in investment grade "asset-backed
securities." These include secured debt instruments backed by automobile loans,
credit card loans, home equity loans, manufactured housing loans and other types
of secured loans providing the source of both principal and interest.
The Fund may enter into interest rate and total return swap agreements.
Diversified Income Fund may purchase securities on a "when issued" or "delayed
delivery" basis in excess of customary settlement periods for the type of
security involved. Securities purchased on a when issued basis are subject to
market fluctuations and no interest or dividends accrue to the Fund prior to the
settlement date. The Fund will establish a segregated account with its custodian
bank in which it will maintain cash or liquid securities equal in value to
commitments for such when issued securities.
Diversified Income Fund may invest in repurchase agreements on an overnight
basis. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors." The Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
From time to time, Diversified Income Fund may invest part or all of its assets
in commercial notes or money market instruments.
HIGH YIELD FUND. The investment objective of High Yield Fund is to seek high
current income. Capital appreciation is a secondary objective. Under normal
circumstances, the Fund will seek its investment objective by investing
primarily in a broad range of income producing securities, including (i) higher
yielding, higher risk, debt securities (commonly referred to as "junk bonds");
(ii) preferred stock; (iii) securities issued by foreign governments, their
agencies and instrumentalities, and foreign corporations, provided that such
securities are denominated in U.S. dollars; (iv) mortgage-backed securities
("MBSs"); (v) asset-backed securities; (vi) securities issued or guaranteed by
the U.S. Government or any of its agencies or instrumentalities, including
Treasury bills, certificates of indebtedness, notes and bonds; (vii) securities
issued or guaranteed by, the Dominion of Canada or provinces thereof; (viii)
real estate investment trusts; and (ix) zero coupon securities. The Fund may
also invest up to 35% of its assets in common stock (which may include ADRs),
warrants and rights. Under normal circumstances, at least 65% of the Fund's
total assets will be invested in high-yielding, high risk debt securities.
High Yield Fund may invest up to 100% of its assets in debt securities that, at
the time of purchase, are rated below investment grade ("high yield securities"
or "junk bonds"), which involve a high degree of risk and are predominantly
speculative. For a description of debt ratings and a discussion of the risks
associated with investing in junk bonds, see "Investment Methods and Risk
Factors." Included in the debt securities which the Fund may purchase are
convertible bonds, or bonds with warrants attached. A "convertible bond" is a
bond, debenture, or preferred share which may be exchanged by the owner for
common stock or another security, usually of the same company, in accordance
with the terms of the issue. A "warrant" confers upon the holder the right to
purchase an amount of securities at a particular time and price. See "Investment
Methods and Risk Factors" for a discussion of the risks associated with such
securities.
High Yield Fund may purchase securities which are obligations of, or guaranteed
by, the Dominion of Canada or provinces thereof and debt securities issued by
Canadian corporations. Canadian securities will not be purchased if subject to
the foreign interest equalization tax and unless payable in U.S. dollars. The
Fund may also invest in debt securities issued by foreign governments (including
Brady Bonds), their agencies and instrumentalities and foreign corporations
(including those in emerging markets), provided such securities are denominated
in U.S. dollars. The Fund's investment in foreign securities, excluding Canadian
securities, will not exceed 25% of the Fund's net assets. See "Investment Method
and Risk Factors" for a discussion of the risks associated with investing in
foreign securities and emerging markets.
High Yield Fund may invest up to 25% of its total assets in MBSs, including
mortgage pass-through securities and collateralized mortgage obligations (CMOs).
The Fund may invest in securities known as "inverse floating obligations,"
"residual interest bonds," and "interest only" (IO) and "principal only" (PO)
bonds, the market values of which generally will be more volatile than the
market values of most MBSs. This is due to the fact that such instruments are
more sensitive to interest rate changes and to the rate of principal prepayments
than are most other MBSs. For a discussion of MBSs and the risks associated with
such securities, see "Investment Methods and Risk Factors."
The Fund may also invest up to 15% of its net assets in "asset-backed
securities." These include secured debt instruments backed by automobile loans,
credit card loans, home equity loans, manufactured housing loans and other types
of secured loans providing the source of both principal and interest.
Asset-backed securities are subject to risks similar to those discussed with
respect to MBSs. See "Investment Methods and Risk Factors."
The Fund may invest in U.S. Government securities. U.S. Government securities
include bills, certificates of indebtedness, notes and bonds issued by the
Treasury or by agencies or instrumentalities of the U.S. Government. High Yield
Fund may also invest in zero coupon securities which are debt securities that
pay no cash income but are sold at substantial discounts from their face value.
Certain zero coupon securities also provide for the commencement of regular
interest payments at a deferred date.
High Yield Fund may invest not more than 10% of its total assets in securities
which are restricted as to disposition under the federal securities laws. The
Fund may purchase without regard to this limitation restricted securities which
are eligible for resale pursuant to Rule 144A under the Securities Act of 1933
("Rule 144A Securities"), subject to the Fund's policy that not more than 15% of
its total assets may be invested in illiquid securities. See "Investment Methods
and Risk Factors" for a discussion of restricted securities.
The Fund may purchase securities on "when issued" or "delayed delivery" basis in
excess of customary settlement periods for the type of security involved. The
Fund may also purchase or sell securities on a "forward commitment" basis and
may enter into "repurchase agreements", "reverse repurchase agreements" and
"roll transactions." The Fund may lend securities to broker-dealers, other
institutions or other persons to earn additional income. The value of loaned
securities may not exceed 33 1/3% of the Fund's total assets. In addition, the
Fund may purchase loans, loan participations and other types of direct
indebtedness.
High Yield Fund may invest in real estate investment trusts ("REITs") and other
real estate industry investments. See the discussion of real estate securities
under "Investment Methods and Risk Factors."
High Yield Fund may enter into futures contracts (a type of derivative) (or
options thereon) to hedge all or a portion of its portfolio, as a hedge against
changes in prevailing levels of interest rates or as an efficient means of
adjusting its exposure to the bond market. The Fund will not use futures
contracts for leveraging purposes. The Fund will limit its use of futures
contracts so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5% of the Fund's net asset value.
The Fund may purchase call and put options and write such options on a "covered"
basis. The Fund may also enter into interest rate and index swaps and purchase
or sell related caps, floors and collars. The aggregate market value of the
Fund's portfolio securities covering call or put options will not exceed 25% of
the Fund's net assets. See "Investment Methods and Risk Factors" for a
discussion of the risks associated with these types of investments.
As an operating policy, the Fund will not purchase securities on margin. The
Fund may, however, obtain such short-term credits as are necessary for the
clearance of purchases and sales of securities. In addition, the Fund may enter
into certain derivative transactions, consistent with its investment program,
which require the deposit of "margin" or a premium to initiate such a
transaction. As an operating policy, the Fund will not loan its assets to any
person or individual, except by the purchase of bonds or other debt obligations
customarily sold to institutional investors. The Fund may, however, lend
portfolio securities as described in the Prospectus and this statement of
additional information. In addition, the Fund does not interpret this
restriction as prohibiting investment in loan participations and assignments as
described in the Prospectus. As an operating policy, the Fund will not engage in
short sales.
The Fund's investment in warrants, valued at the lower of cost or market, will
not exceed 5% of the Fund's net assets. Included within this amount, but not to
exceed 2% of the Fund's net assets, may be warrants which are not listed on the
New York or American Stock Exchange. Warrants acquired by the Fund in units or
attached to securities may be deemed to be without value.
From time to time, High Yield Fund may invest part or all of its assets in U.S.
Government securities, commercial notes or money market instruments. It is
anticipated that the dollar weighted average maturity of the Fund will range
from 5 to 15 years under normal circumstances.
SECURITY MUNICIPAL BOND FUND -- The investment objective of Municipal Bond Fund
is to obtain as high a level of interest income exempt from regular federal
income taxes as is consistent with preservation of stockholders' capital.
Municipal Bond Fund attempts to achieve its objective by investing primarily in
debt securities, the interest on which is exempt from regular federal income
taxes under the Internal Revenue Code. The Fund may invest in securities which
generate income that is subject to the federal alternative minimum tax. There is
no assurance that Municipal Bond Fund's objective will be achieved.
The tax-exempt securities in which Municipal Bond Fund invests include debt
obligations issued by or on behalf of the states, territories and possessions of
the United States, the District of Columbia, and their political subdivisions,
agencies, authorities and instrumentalities, including multi-state agencies or
authorities. These securities are referred to as "municipal securities" and are
described in more detail below.
Municipal Bond Fund's investments in municipal securities are limited to
securities of "investment grade" quality, that is securities rated within the
four highest rating categories of Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A,
BBB) or Fitch (AAA, AA, A, BBB), except that the Fund may purchase unrated
municipal securities (i) where the securities are guaranteed as to principal and
interest by the full faith and credit of the U.S. government or are short-term
municipal securities (those having a maturity of less than one year) of issuers
having outstanding at the time of purchase an issue of municipal bonds having
one of the four highest ratings, or (ii) where, in the opinion of the
Sub-Adviser, Salomon Brothers Asset Management Inc, the unrated municipal
securities are comparable in quality to those within the four highest ratings.
However, Municipal Bond Fund will not purchase an unrated municipal security
(other than a security described in (i) above) if, after such purchase, more
than 20% of the Fund's total assets would be invested in such unrated municipal
securities.
With respect to rated securities, there is no percentage limitation on the
amount of Municipal Bond Fund's assets which may be invested in securities
within any particular rating classification. A description of the ratings is
contained in Appendix B to the Prospectus. Baa securities are considered "medium
grade" obligations by Moody's, and BBB is the lowest classification which is
still considered an "investment grade" rating by S&P and Fitch. Baa securities
are described by Moody's as obligations on which "interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time." According to Moody's, "such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well." According
to Fitch, "adverse changes in economic conditions and circumstances are more
likely to have adverse impact on these bonds, and therefore impair timely
payment." The ratings of Moody's, S&P and Fitch represent their respective
opinions of the quality of the securities they undertake to rate and such
ratings are general and are not absolute standards of quality.
Although Municipal Bond Fund invests primarily in municipal bonds with
maturities greater than one year, it also will invest for various purposes in
short-term (maturity equal to or less than one year) securities which, to the
extent practicable, will be short-term municipal securities. (See "Municipal
Securities," below.) Short-term investments may be made, pending investment of
funds in municipal bonds, in order to maintain liquidity to meet redemption
requests, or to maintain a temporary "defensive" investment position when, in
the opinion of the Investment Manager, it is advisable to do so on account of
current or anticipated market conditions. Except when in a temporary "defensive"
position, investments in short-term municipal securities will represent less
than 20% of the Fund's total assets.
From time to time, on a temporary basis, Municipal Bond Fund may invest in
fixed-income obligations on which the interest is subject to federal income tax.
Except when the Fund is in a temporary "defensive" investment position, it will
not purchase a taxable security if, as a result, more than 20% of its total
assets would be invested in taxable securities. This limitation is a fundamental
policy of Municipal Bond Fund, and may not be changed without a majority vote of
the Fund's outstanding securities. Temporary taxable investments of the Fund may
consist of obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, commercial paper rated A-1 by S&P, Prime-1 by
Moody's or F-1 by Fitch, corporate obligations rated AAA or AA by S&P and Fitch
or Aaa or Aa by Moody's, certificates of deposit or bankers' acceptances of
domestic banks or thrifts with at least $2 billion in assets, or repurchase
agreements with such banks or with broker/dealers. Municipal Bond Fund may
invest its assets in bank demand accounts, pending investment in other
securities or to meet potential redemptions or expenses. Repurchase agreements
may be entered into with respect to any securities eligible for investment by
the Fund, including municipal securities. The Fund may also invest in zero
coupon securities which are debt securities that pay no cash income but are sold
at substantial discounts from their face value. Certain zero coupon securities
also provide for the commencement of regular interest payments at a deferred
date.
Municipal Bond Fund may invest in repurchase agreements which are agreements by
which a purchaser (e.g., Municipal Bond Fund) acquires a security and
simultaneously commits to resell that security to the seller (a bank or
broker/dealer) at an agreed upon price on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. Income earned by
the Fund on repurchase agreements is not exempt from federal income tax even if
the transaction involves municipal securities. Municipal Bond Fund may not enter
into a repurchase agreement having more than seven days remaining to maturity
if, as a result, such agreements, together with any other securities which are
illiquid or not readily marketable, would exceed 10% of the total assets of the
Fund. See the discussion of repurchase agreements under "Investment Methods and
Risk Factors."
Municipal Bond Fund may borrow money from banks as a temporary measure for
emergency purposes or to facilitate redemption requests. Borrowing is discussed
in more detail under "Investment Methods and Risk Factors." Pending investment
in securities or to meet potential redemptions, the Fund may invest in
certificates of deposit, bank demand accounts and high quality money market
instruments.
Municipal Bond Fund may purchase or sell futures contracts on (a) debt
securities that are backed by the full faith and credit of the U.S. Government,
such as long-term U.S. Treasury Bonds and Treasury Notes and (b) municipal bond
indices. Currently at least one exchange trades futures contracts on an index of
long-term municipal bonds, and the Fund reserves to right to conduct futures
transactions based on an index which may be developed in the future to correlate
with price movements in municipal obligations. It is not presently anticipated
that any of these strategies will be used to a significant degree by the Fund.
For further information regarding futures contracts, see "Investment Methods and
Risk Factors."
See Appendix B to the Prospectus for a further description of Moody's, S&P and
Fitch ratings relating to municipal securities. As noted earlier, when Municipal
Bond Fund is in a temporary "defensive" position, there is no limit on its
investments in short-term municipal securities and taxable securities.
MUNICIPAL SECURITIES.
MUNICIPAL BONDS. Municipal bonds are debt obligations which generally have a
maturity at the time of issue in excess of one year. They are issued to obtain
funds for various public purposes, including construction of a wide range of
public facilities such as bridges, highways, housing, hospitals, mass
transportation, schools, streets, and water and sewer works. Other public
purposes for which municipal bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and
obtaining funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds and other private
activity bonds are issued by or on behalf of public authorities to obtain funds
to provide for privately-operated housing facilities, and certain facilities for
water supply, gas, electricity or sewage or solid waste disposal.
The two principal classifications of municipal bonds are "general obligation"
and "revenue" bonds. General obligation bonds are secured by the issuer's pledge
of its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities, or, in some cases, from the proceeds
of a special excise or specific revenue source. Revenue securities may include
private activity bonds. Such bonds may be issued by or on behalf of public
authorities to finance various privately operated facilities and are not payable
from the unrestricted revenues of the issuer. As a result, the credit quality of
private activity bonds is frequently related directly to the credit standing of
private corporations or other entities. In addition, the interest on private
activity bonds issued after August 7, 1986 is subject to the federal alternative
minimum tax. The Fund will not be restricted with respect to the proportion of
its assets that may be invested in such obligations. Accordingly, the Fund may
not be a suitable investment vehicle for individuals or corporations that are
subject to the federal alternative minimum tax. Municipal Bond Fund will not
invest more than 5% of its net assets in securities where the principal and
interest are the responsibility of a private corporation or other entity which
has, including predecessors, less than three years' operational history.
There are, depending on numerous factors, variations in the risks involved in
holding municipal securities, both within a particular rating classification and
between classifications. The market values of outstanding municipal bonds will
vary as a result of the rating of the issue and changing evaluations of the
ability of the issuer to meet interest and principal payments. Such market
values will also change in response to changes in the interest rates payable on
new issues of municipal bonds. Should such interest rates rise, the values of
outstanding bonds, including those held in Municipal Bond Fund's portfolio,
would decline; should such interest rates decline, the values of outstanding
bonds would increase.
As a result of litigation or other factors, the power or ability of issuers of
municipal securities to pay principal and/or interest might be adversely
affected. Municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Federal Bankruptcy Code, and laws, if any, which may be enacted by
Congress or state legislatures extending the time for payment of principal or
interest or both, or imposing other constraints upon enforcement of such
obligations or upon the power of municipalities to levy taxes.
Municipal Bond Fund may invest without percentage limitations in issues of
municipal securities which have similar characteristics, such as the location of
their issuers in the same geographic region or the derivation of interest
payments from revenues on similar projects (for example, electric utility
systems, hospitals, or housing finance agencies). Thus, Municipal Bond Fund may
invest more than 25% of its total assets in securities issued in a single state.
However, it may not invest more than 25% of its total assets in one industry.
(See "Investment Policy Limitations," page 24.) Consequently, the Fund's
portfolio of municipal securities may be more susceptible to the risks of
adverse economic, political, or regulatory developments than would be the case
with a portfolio of securities required to be more diversified as to geographic
region and/or source of revenue.
Interest on certain types of private activity bonds (for example, obligations to
finance certain exempt facilities which may be leased to or used by persons
other than the issuer) will not be exempt from federal income tax when received
by "substantial users" or persons related to "substantial users" as defined in
the Internal Revenue Code. The term "substantial user" generally includes any
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of private activity bonds. Municipal Bond Fund may
invest periodically in private activity bonds and, therefore, may not be an
appropriate investment for entities which are substantial users of facilities
financed by those bonds or "related persons" of substantial users. Generally, an
individual will not be a related person of a substantial user under the Code
unless the person or his immediate family (spouse, brothers, sisters and lineal
descendants) directly or indirectly owns in the aggregate more than 50% in value
of the equity of the substantial user.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on future issues of municipal securities. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of municipal securities for investment by Municipal
Bond Fund and the value of the Fund's portfolio would be affected. In that
event, the Directors would reevaluate the Fund's investment objective and
policies.
WHEN-ISSUED PURCHASES. From time to time, in the ordinary course of business,
Municipal Bond Fund may purchase municipal securities on a when-issued or
delayed delivery basis--i.e., delivery and payment can take place a month or
more after the date of the transactions. Securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during this period.
At the time the Fund makes the commitment to purchase a municipal security on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the security in determining its net
asset value. Municipal Bond Fund will also establish a segregated account with
its custodian bank in which it will maintain cash or liquid securities equal in
value to commitments for such when-issued or delayed delivery securities.
Municipal Bond Fund does not believe that its net asset value or income will be
adversely affected by its purchase of municipal securities on a when-issued or
delayed delivery basis. Upon the settlement date of the when-issued securities,
the Fund ordinarily will meet its obligation to purchase the securities from
available cash flow, use of the cash (or liquidation of securities) held in the
segregated account or sale of other securities. Although it would not normally
expect to do so, the Fund also may meet its obligation from the sale of the
when-issued securities themselves (which may have a current market value greater
or less than the Fund's payment obligation). Sale of securities to meet such
obligations carries with it a greater potential for the realization of net
capital gains, which are not exempt from federal income tax.
PUTS OR STAND-BY COMMITMENTS. Municipal Bond Fund may purchase, from banks or
broker/dealers, municipal securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. Such a right to resell is
commonly known as a "put" and is also referred to as a "stand-by commitment" on
the part of the seller. The price which the Fund pays for the municipal
securities with puts generally is higher than the price which otherwise would be
paid for the municipal securities alone. Municipal Bond Fund uses puts for
liquidity purposes in order to permit it to remain more fully invested in
municipal securities than would otherwise be the case by providing a ready
market for certain municipal securities in its portfolio at an acceptable price.
The put generally is for a shorter term than the maturity of the municipal
security and does not restrict in any way the Fund's ability to dispose of (or
retain) the municipal security.
In order to ensure that the interest on municipal securities subject to puts is
tax-exempt to the Fund, it will limit its use of puts in accordance with current
interpretations or rulings of the Internal Revenue Service (IRS). The IRS has
issued a ruling (Rev. Rul. 82-144) in which it determined that a regulated
investment company was the owner, for tax purposes, of municipal securities
subject to puts (with the result that interest on those securities would not
lose its tax-exempt status when paid to the company). The IRS position in Rev.
Rul. 82-144 relates to a particular factual situation, in which (i) the price
paid for the puts was in addition to the price of the municipal securities
subject to the puts, (ii) the puts established the price at which the seller
must repurchase the securities, (iii) the puts were nonassignable and terminated
upon disposal of the underlying securities by the Fund, (iv) the puts were for
periods substantially less than the terms of the underlying securities, (v) the
puts did not include call arrangements or restrict the disposal of the
underlying securities by the Fund and gave the seller no rights in the
underlying securities, and (vi) the securities were acquired by the Fund for its
own account and not as security for a loan from the seller.
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts will be determined to have a "value" of zero, regardless
of whether any direct or indirect consideration was paid. Amounts paid by
Municipal Bond Fund for a put will be reflected as unrealized depreciation in
the underlying security for the period during which the commitment is held, and
therefore will reduce any potential gains on the sale of the underlying security
by the cost of the put. There is a risk that the seller of the put may not be
able to repurchase the security upon exercise of the put by the Fund.
SHORT-TERM MUNICIPAL SECURITIES. Although Municipal Bond Fund's portfolio
generally will consist primarily of municipal bonds, for liquidity purposes, and
from time to time for defensive purposes, a portion of its assets may be
invested in short-term municipal securities (i.e., those with less than one year
remaining to maturity).
Short-term municipal securities consist of short-term municipal notes and
short-term municipal loans and obligations, including municipal paper, master
demand notes and variable-rate demand notes. Short-term municipal notes include
tax anticipation notes (notes issued in anticipation of the receipt of tax
funds), bond anticipation notes (notes issued in anticipation of receipt of the
proceeds of bond placements), revenue anticipation notes (notes issued in
anticipation of the receipt of revenues other than taxes or bond placements),
and project notes (obligations of municipal housing agencies on which the
payment of principal and interest ordinarily is backed by the full faith and
credit of the U.S. government). Municipal paper typically consists of the very
short-term unsecured negotiable promissory notes of municipal issuers.
The Fund may invest in tax-exempt master demand notes. A municipal master demand
note is an arrangement under which the Fund participates in a note agreement
between a bank acting on behalf of its clients and a municipal borrower, whereby
amounts maintained by the Fund in an account with the bank are provided to the
municipal borrower and payments of interest and principal on the note are
credited to the Fund's account. Interest rates on master demand notes typically
are tied to market interest rates, and therefore may fluctuate daily. The
amounts borrowed under these notes may be repaid at any time by the borrower
without penalty, and must be repaid upon the demand of Municipal Bond Fund.
Municipal Bond Fund may also invest in variable-rate demand notes. Variable-rate
demand notes are tax-exempt obligations which are payable by the municipal
issuer at par value plus accrued interest on demand by the Fund (generally with
three to ten days' notice). If no demand is made, the note will mature on a
specified date from one to thirty years from its issuance. Payment on the note
may be backed by a stand-by letter of credit. The yield on a variable rate
demand note is adjusted automatically to reflect a particular market rate (which
may not be the same market rate as that applicable to a master demand note).
Variable-rate demand notes typically are callable by the issuer prior to
maturity.
Where short-term municipal securities are rated, the Municipal Bond Fund will
limit its investments to "high quality" short-term securities. For short-term
municipal notes this includes ratings of SP-2 or better by S&P, MIG 2 or better
(or VMIG-2 or better, in the case of variable rate demand notes) by Moody's or
F-2 or better by Fitch; for municipal paper this includes A-2 or better by S&P,
Prime-2 or better by Moody's or F-2 or better by Fitch. Unrated short-term
municipal securities will be included within the Fund's overall limitation on
investments in unrated municipal securities. This limitation provides that not
more than 20% of Municipal Bond Fund's total assets may be invested in unrated
municipal securities, exclusive of unrated securities which are guaranteed as to
principal and interest by the full faith and credit of the U.S. government or
are issued by an issuer having outstanding an issue of municipal bonds within
one of the four highest ratings classifications.
Municipal Bond Fund also may engage to a limited extent in portfolio trading
consistent with its investment objective. Securities may be sold in anticipation
of a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another of comparable quality purchased at
approximately the same time to take advantage of what the Fund believes to be a
temporary disparity in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly related to the
investment quality of a particular issue or the general movement of interest
rates, such as changes in the overall demand for, or supply of, various types of
municipal securities.
SECURITY CASH FUND -- The investment objective of Cash Fund is to seek as high a
level of current income as is consistent with preservation of capital and
liquidity. No assurances can be given that Cash Fund will achieve its objective.
The Fund will attempt to achieve its objective by investing at least 95% of its
total assets, measured at the time of investment, in a diversified portfolio of
highest quality money market instruments. Cash Fund may also invest up to 5% of
its total assets, measured at the time of investment, in money market
instruments that are in the second-highest rating category for short-term debt
obligations. Money market instruments in which Cash Fund may invest consist of
the following:
U.S. GOVERNMENT SECURITIES. Obligations issued or guaranteed (as to principal or
interest) by the United States Government or its agencies (such as the Small
Business Administration, the Federal Housing Administration and Government
National Mortgage Association) or instrumentalities (such as Federal Home Loan
Banks and Federal Land Banks) and instruments fully collateralized with such
obligations.
BANK OBLIGATIONS. Obligations of banks or savings and loan associations that are
members of the Federal Deposit Insurance Corporation and instruments fully
collateralized with such obligations.
CORPORATE OBLIGATIONS. Commercial paper issued by corporations and rated Prime-1
or Prime-2 by Moody's, or A-1 or A-2 by S&P, or other corporate debt instruments
rated Aaa or Aa or better by Moody's or AAA or AA or better by S&P, subject to
the limitations on investment in instruments in the second-highest rating
category, discussed below.
Cash Fund may invest in certificates of deposit issued by banks or other bank
demand accounts, pending investment in other securities or to meet potential
redemptions or expenses.
Cash Fund may invest only in U.S. dollar denominated money market instruments
that present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality. The
Investment Manager will determine whether a security presents minimal credit
risk under procedures adopted by the Fund's Board of Directors. A security will
be considered to be highest quality (1) if rated in the highest rating category,
(e.g., Aaa or Prime-1 by Moody's or AAA or A-1 by S&P) by (i) any two nationally
recognized statistical rating organizations ("NRSRO's") or, (ii) if rated by
only one NRSRO, by that NRSRO; (2) if issued by an issuer that has short-term
debt obligations of comparable maturity, priority, and security and that are
rated in the highest rating category by (i) any two NRSRO's or, (ii) if rated by
only one NRSRO, by that NRSRO; or (3) an unrated security that is of comparable
quality to a security in the highest rating category as determined by the
Investment Manager. With respect to 5% of its total assets, measured at the time
of investment, Cash Fund may also invest in money market instruments that are in
the second-highest rating category for short-term debt obligations (e.g., rated
Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument will be
considered to be in the second-highest rating category under the criteria
described above with respect to instruments considered highest quality, as
applied to instruments in the second-highest rating category. See Appendix A to
the Prospectus for a description of the principal types of securities and
instruments in which the Fund will invest as well as a description of the above
mentioned ratings.
Cash Fund may not invest more than 5% of its total assets, measured at the time
of investment, in the securities of any one issuer that are of the highest
quality or more than the greater of 1% of its total assets or $1,000,000,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that these limitations shall not
apply to U.S. Government securities. The Fund may exceed the 5% limitation for
up to three business days after the purchase of the securities of any one issuer
that are of the highest quality, provided that the Fund does not have
outstanding at any time more than one such investment. In the event that an
instrument acquired by Cash Fund is downgraded, the Investment Manager, under
procedures approved by the Board of Directors, shall promptly reassess whether
such security presents minimal credit risk and determine whether or not to
retain the instrument, or Investment Manager may forego the reassessment of
credit risk if the security is disposed of or matures within five business days
of downgrade and the Board is subsequently notified of the Investment Manager's
actions. In the event that an instrument acquired by Cash Fund ceases to be of
the quality that is eligible for the Fund, the Fund shall promptly dispose of
the instrument in an orderly manner unless the Board of Directors determines
that this would not be in the best interests of the Fund.
Cash Fund may acquire one or more of the above types of securities subject to
repurchase agreements. A repurchase transaction involves a purchase by the Fund
of a security from a selling financial institution, such as a bank, savings and
loan association or broker/dealer, which agrees to repurchase such security at a
specified price and at a fixed time in the future, usually not more than seven
days from the date of purchase. Not more than 10% of Cash Fund's net assets will
be invested in illiquid assets, which include repurchase agreements with
maturities of more than seven days. See the discussion of repurchase agreements
under "Investment Methods and Risk Factors."
Cash Fund may borrow money from banks as a temporary measure for emergency
purposes or to facilitate redemption requests. Borrowing is discussed in more
detail under "Investment Methods and Risk Factors." Pending investment in
securities or to meet potential redemptions, the Fund may invest in certificates
of deposit, bank demand accounts and high quality money market instruments.
Cash Fund may also invest in guaranteed investment contracts ("GICs") issued by
insurance companies, subject to the Fund's policy that not more than 10% of the
Fund's total assets will be invested in illiquid assets. See the discussion of
GICs under "Investment Methods and Risk Factors."
RULE 144A SECURITIES. Certain of the securities acquired by Cash Fund may be
restricted as to disposition under federal securities laws, provided that such
restricted securities are eligible for resale to qualified institutional
investors pursuant to Rule 144A under the Securities Act of 1933 (the
"Securities Act"). Rule 144A provides a nonexclusive safe harbor exemption from
the registration requirements of the Securities Act for the resale of certain
securities to certain qualified buyers. One of the primary purposes of the Rule
is to create some resale liquidity for certain securities that would otherwise
be treated as illiquid investments. In accordance with Cash Fund's policies, the
Fund is not permitted to invest more than 10% of its net assets in illiquid
securities. See the discussion of Rule 144A Securities under "Investment Methods
and Risk Factors."
VARIABLE RATE INSTRUMENTS. Cash Fund may invest in instruments having rates of
interest that are adjusted periodically according to a specified market rate for
such investments ("Variable Rate Instruments"). The interest rate on a Variable
Rate Instrument is ordinarily determined by reference to, or is a percentage of,
an objective standard such as a bank's prime rate or the 91-day U.S. Treasury
Bill rate. Cash Fund does not purchase certain Variable Rate Instruments that
have a preset cap above which the rate of interest may not rise. Generally, the
changes in the interest rate on Variable Rate Instruments reduce the fluctuation
in the market value of such securities. Accordingly, as interest rates decrease
or increase, the potential for capital appreciation or depreciation is less than
for fixed-rate obligations. Cash Fund determines the maturity of Variable Rate
Instruments in accordance with Rule 2a-7 under the Investment Company Act of
1940 which allows the Fund generally to consider the maturity date of such
instruments to be the period remaining until the next readjustment of the
interest rate rather than the maturity date on the face of the instrument.
While Cash Fund does not intend to engage in short-term trading, portfolio
securities may be sold without regard to the length of time that they have been
held. A portfolio security could be sold prior to maturity to take advantage of
new investment opportunities or yield differentials, or to preserve gains or
limit losses due to changing economic conditions or the financial condition of
the issuer, or for other reasons. While Cash Fund is expected to have a high
portfolio turnover due to the short maturities of its portfolio securities, this
should not affect the Fund's income or net asset value since brokerage
commissions are not normally paid in connection with the purchase or sale of
money market instruments.
Cash Fund will invest in money market instruments of varying maturities (but no
longer than 13 months) in an effort to earn as high a level of current income as
is consistent with preservation of capital and liquidity. The Fund intends to
maintain a weighted average maturity in its portfolio of not more than 90 days.
In addition to general market risks, Fund investments in nongovernment
obligations are subject to the ability of the issuer to satisfy its obligations.
Cash Fund also intends to maintain a net asset value per share of $1.00,
although there can be no assurance it will be able to do so. It is the Fund's
policy to declare dividends on a daily basis of an amount equal to the net
income plus or minus any realized capital gains or losses. (See "Dividends and
Taxes," page 44.)
INVESTMENT METHODS AND RISK FACTORS
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Funds are described in the
sections of the Prospectus entitled "Funds' Principal Investment Strategies,"
"Main Risks" and "Investment Policies and Management Practices." The following
is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Funds which may invest in such securities and instruments or which use
such techniques. Also included is a general description of some of the
investment instruments, techniques and methods which may be used by one or more
of the Funds. The methods described only apply to those Funds which may use such
methods. Although a Fund may employ the techniques, instruments and methods
described below, consistent with its investment objective and policies and any
applicable law, no Fund will be required to do so.
GENERAL RISK FACTORS -- Each Fund's net asset value will fluctuate, reflecting
fluctuations in the market value of its portfolio positions. The value of fixed
income securities held by the Funds generally fluctuates inversely with interest
rate movements. In other words, bond prices generally fall as interest rates
rise and generally rise as interest rates fall. Longer term bonds held by the
Funds are subject to greater interest rate risk. There is no assurance that any
Fund will achieve its investment objective.
REPURCHASE AGREEMENTS, REVERSE REPURCHASE AGREEMENTS AND ROLL TRANSACTIONS --
Each of the Funds may enter into repurchase agreements. Repurchase agreements
are transactions in which the purchaser buys a debt security from a bank or
recognized securities dealer and simultaneously commits to resell that security
to the bank or dealer at an agreed upon price, date and market rate of interest
unrelated to the coupon rate or maturity of the purchased security. Repurchase
agreements are considered to be loans which must be fully collateralized
including interest earned thereon during the entire term of the agreement. If
the institution defaults on the repurchase agreement, the Fund will retain
possession of the underlying securities. If bankruptcy proceedings are commenced
with respect to the seller, realization on the collateral by the Fund may be
delayed or limited and the Fund may incur additional costs. In such case, the
Fund will be subject to risks associated with changes in market value of the
collateral securities. The Fund intends to enter into repurchase agreements only
with banks and broker/dealers believed to present minimal credit risks.
Accordingly, the Funds will enter into repurchase agreements only with (a)
brokers having total capitalization of at least $40 million and a ratio of
aggregate indebtedness to net capital of no more than 4 to 1, or, alternatively,
net capital equal to 6% of aggregate debit balances, or (b) banks having at
least $1 billion in assets and a net worth of at least $100 million as of its
most recent annual report. In addition, the aggregate repurchase price of all
repurchase agreements held by the Fund with any broker shall not exceed 15% of
the total assets of the Fund or $5 million, whichever is greater.
The High Yield Fund may also enter into reverse repurchase agreements with the
same parties with whom it may enter into repurchase agreements. Under a reverse
repurchase agreement, the Fund would sell securities and agree to repurchase
them at a particular price at a future date. Reverse repurchase agreements
involve the risk that the market value of the securities retained in lieu of
sale by a Fund may decline below the price of the securities the Fund has sold
but is obligated to repurchase. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, such
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's obligation to repurchase the securities, and the
Fund's use of the proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
The High Yield Fund also may enter into "dollar rolls," in which the Fund sells
fixed income securities for delivery in the current month and simultaneously
contracts to repurchase substantially similar (same type, coupon and maturity)
securities on a specified future date. During the roll period, the Fund would
forego principal and interest paid on such securities. The Fund would be
compensated by the difference between the current sales price and the forward
price for the future purchase, as well as by the interest earned on the cash
proceeds of the initial sale.
BORROWING -- Each of the Funds may borrow money from banks as a temporary
measure for emergency purposes, or to facilitate redemption requests.
From time to time, it may be advantageous for the Funds to borrow money rather
than sell existing portfolio positions to meet redemption requests. Accordingly,
the Funds may borrow from banks and High Yield Fund may borrow through reverse
repurchase agreements and "roll" transactions, in connection with meeting
requests for the redemption of Fund shares. As an operating policy, each Fund
may borrow up to 10% of total Fund assets. In addition to this operating policy,
Cash Fund may not purchase securities while borrowings equal to 5% of its total
assets are outstanding. To the extent that a Fund purchases securities while it
has outstanding borrowings, it is using leverage, i.e. using borrowed funds for
investment. Leveraging will exaggerate the effect on net asset value of any
increase or decrease in the market value of a Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs that may or may not be
recovered by appreciation of the securities purchased; in certain cases,
interest costs may exceed the return received on the securities purchased. A
Fund also may be required to maintain minimum average balances in connection
with such borrowing or to pay a commitment or other fee to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. It is not expected that Cash Fund would purchase
securities while it had borrowings outstanding.
LENDING OF PORTFOLIO SECURITIES -- For the purpose of generating income, certain
of the Funds may make secured loans of Fund securities amounting to not more
than 33 1/3% of its total assets. Securities loans are made to broker/dealers,
institutional investors, or other persons pursuant to agreements requiring that
the loans be continuously secured by collateral at least equal at all times to
the value of the securities loaned marked to market on a daily basis. The
collateral received will consist of cash, U.S. Government securities, letters of
credit or such other collateral as may be permitted under its investment
program. While the securities are being loaned, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities on five business days' notice or, in connection with securities
trading on foreign markets, within such longer period of time which coincides
with the normal settlement period for purchases and sales of such securities in
such foreign markets. The Fund will not have the right to vote securities while
they are being loaned, but it will call a loan in anticipation of any important
vote. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to persons deemed
by the Investment Manager to be of good standing and will not be made unless, in
the judgment of the Investment Manager, the consideration to be earned from such
loans would justify the risk.
GUARANTEED INVESTMENT CONTRACTS ("GICS") -- Certain of the Funds may invest in
GICs. When investing in GICs, the Fund makes cash contributions to a deposit
fund of an insurance company's general account. The insurance company then
credits guaranteed interest to the deposit fund on a monthly basis. The GICs
provide that this guaranteed interest will not be less than a certain minimum
rate. The insurance company may assess periodic charges against a GIC for
expenses and service costs allocable to it, and the charges will be deducted
from the value of the deposit fund. Cash Fund may invest only in GICs that have
received the requisite ratings by one or more NRSROs. Because a Fund may not
receive the principal amount of a GIC from the insurance company on 7 days'
notice or less, the GIC is considered an illiquid investment. In determining
average portfolio maturity, GICs generally will be deemed to have a maturity
equal to the period of time remaining until the next readjustment of the
guaranteed interest rate.
RESTRICTED SECURITIES (RULE 144A SECURITIES) --The Funds may invest in
restricted securities which are securities that are restricted as to disposition
under the federal securities laws, provided that such securities are eligible
for resale to qualified institutional investors pursuant to Rule 144A under the
Securities Act of 1933. Rule 144A permits the resale to "qualified institutional
buyers" of "restricted securities" that, when issued, were not of the same class
as securities listed on a U.S. securities exchange or quoted in the National
Association of Securities Dealers Automated Quotation System (the "Rule 144A
Securities"). A "qualified institutional buyer" is defined by Rule 144A
generally as an institution, acting for its own account or for the accounts of
other qualified institutional buyers, that in the aggregate owns and invests on
a discretionary basis at least $100 million in securities of issuers not
affiliated with the institution. A dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), acting for its own account or the
accounts of other qualified institutional buyers, that in the aggregate owns and
invests on a discretionary basis at least $10 million in securities of issuers
not affiliated with the dealer may also qualify as a qualified institutional
buyer, as well as an Exchange Act registered dealer acting in a riskless
principal transaction on behalf of a qualified institutional buyer.
The Funds' Board of Directors is responsible for developing and establishing
guidelines and procedures for determining the liquidity of Rule 144A Securities.
As permitted by Rule 144A, the Board of Directors has delegated this
responsibility to the Investment Manager. In making the determination regarding
the liquidity of Rule 144A Securities, the Investment Manager will consider
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, the Investment Manager may
consider: (1) the frequency of trades and quotes; (2) the number of dealers and
potential purchasers; (3) dealer undertakings to make a market; and (4) the
nature of the security and of the market place trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). Investing in Rule 144A Securities could have the effect of increasing
the amount of a Fund's assets invested in illiquid securities to the extent that
qualified institutional buyers become uninterested, for a time, in purchasing
these securities.
Certain of the Funds also may purchase restricted securities that are not
eligible for resale pursuant to Rule 144A. The Funds may acquire such securities
through private placement transactions, directly from the issuer or from
security holders, generally at higher yields or on terms more favorable to
investors than comparable publicly traded securities. However, the restrictions
on resale of such securities may make it difficult for the Fund to dispose of
such securities at the time considered most advantageous, and/or may involve
expenses that would not be incurred in the sale of securities that were freely
marketable. Risks associated with restricted securities include the potential
obligation to pay all or part of the registration expenses in order to sell
certain restricted securities. A considerable period of time may elapse between
the time of the decision to sell a security and the time the Fund may be
permitted to sell it under an effective registration statement. If, during a
period, adverse conditions were to develop, a Fund might obtain a less favorable
price than prevailing when it decided to sell.
RISKS ASSOCIATED WITH LOWER-RATED DEBT SECURITIES (JUNK BONDS) -- Certain of the
Funds may invest in higher yielding debt securities in the lower rating (higher
risk) categories of the recognized rating services (commonly referred to as
"junk bonds"). Debt rated BB, B, CCC, CC and C by S&P and rated Ba, B, Caa, Ca
and C by Moody's, is regarded, on balance, as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and C the highest degree of speculation. For Moody's, Ba
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Similarly, debt rated Ba or BB and below is
regarded by the relevant rating agency as speculative. Debt rated C by Moody's
or S&P is the lowest quality debt that is not in default as to principal or
interest and such issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing. Such securities are
also generally considered to be subject to greater risk than higher quality
securities with regard to a deterioration of general economic conditions.
Ratings of debt securities represent the rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit quality in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
The market value of lower quality debt securities tend to reflect individual
developments of the issuer to a greater extent than do higher quality
securities, which react primarily to fluctuations in the general level of
interest rates. In addition, lower quality debt securities tend to be more
sensitive to economic conditions and generally have more volatile prices than
higher quality securities. Issuers of lower quality securities are often highly
leveraged and may not have available to them more traditional methods of
financing. For example, during an economic downturn or a sustained period of
rising interest rates, highly leveraged issuers of lower quality securities may
experience financial stress. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations may also be adversely affected by
specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business forecasts or the unavailability of additional
financing. Similarly, certain emerging market governments that issue lower
quality debt securities are among the largest debtors to commercial banks,
foreign governments and supranational organizations such as the World Bank and
may not be able or willing to make principal and/or interest repayments as they
come due. The risk of loss due to default by the issuer is significantly greater
for the holders of lower quality securities because such securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Lower quality debt securities of corporate issuers frequently have call or
buy-back features which would permit an issuer to call or repurchase the
security from the Fund. If an issuer exercises these provisions in a declining
interest rate market, the Fund may have to replace the security with a lower
yielding security, resulting in a decreased return for investors. In addition,
the Fund may have difficulty disposing of lower quality securities because there
may be a thin trading market for such securities. There may be no established
retail secondary market for many of these securities, and the Fund anticipates
that such securities could be sold only to a limited number of dealers or
institutional investors. The lack of a liquid secondary market also may have an
adverse impact on market prices of such instruments and may make it more
difficult for the Fund to obtain accurate market quotations for purposes of
valuing the securities in the portfolio of the Fund.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of lower quality
securities, especially in a thinly traded market. The High Yield Fund may
acquire lower quality debt securities during an initial underwriting or may
acquire lower quality debt securities which are sold without registration under
applicable securities laws. Such securities involve special considerations and
risks.
Factors having an adverse effect on the market value of lower rated securities
or their equivalents purchased by a Fund will adversely impact net asset value
of the Fund. In addition to the foregoing, such factors may include: (i)
potential adverse publicity; (ii) heightened sensitivity to general economic or
political conditions; and (iii) the likely adverse impact of a major economic
recession. The Fund also may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings, and the Fund may have limited legal recourse in the
event of a default. Debt securities issued by governments in emerging markets
can differ from debt obligations issued by private entities in that remedies
from defaults generally must be pursued in the courts of the defaulting
government, and legal recourse is therefore somewhat diminished. Political
conditions, in terms of a government's willingness to meet the terms of its debt
obligations, also are of considerable significance. There can be no assurance
that the holders of commercial bank debt would not contest payments to the
holders of debt securities issued by governments in emerging markets in the
event of default by the governments under commercial bank loan agreements.
The Investment Manager will attempt to minimize the speculative risks associated
with investments in lower quality securities through credit analyses and by
carefully monitoring current trends in interest rates, political developments
and other factors. Nonetheless, investors should carefully review the investment
objectives and policies of the Funds and consider their ability to assume the
investment risks involved before making an investment in the Funds.
CONVERTIBLE SECURITIES AND WARRANTS -- Certain of the Funds may invest in debt
or preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than nonconvertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally two or more years).
MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE OBLIGATIONS -- Certain of
the Funds may invest in mortgage-backed securities (MBSs), including mortgage
pass-through securities and collateralized mortgage obligations (CMOs). MBSs
include certain securities issued or guaranteed by the United States Government
or one of its agencies or instrumentalities, such as the Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), or
Federal Home Loan Mortgage Corporation (FHLMC); securities issued by private
issuers that represent an interest in or are collateralized by mortgage-backed
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and securities issued by private issuers that represent an
interest in or are collateralized by mortgage loans. A mortgage pass-through
security is a pro rata interest in a pool of mortgages where the cash flow
generated from the mortgage collateral is passed through to the security holder.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Certain of the Funds may invest in securities known
as "inverse floating obligations," "residual interest bonds," or "interest-only"
(IO) and "principal-only" (PO) bonds, the market values of which will generally
be more volatile than the market values of most MBSs. An inverse floating
obligation is a derivative adjustable rate security with interest rates that
adjust or vary inversely to changes in market interest rates. The term "residual
interest" bond is used generally to describe those instruments in collateral
pools, such as CMOs, which receive any excess cash flow generated by the pool
once all other bondholders and expenses have been paid. IOs and POs are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IOs) and the other class principal only
payments (POs). MBSs have been referred to as "derivatives" because the
performance of MBSs is dependent upon and derived from underlying securities.
CMOs may be issued in a variety of classes and the Funds may invest in several
CMO classes, including, but not limited to Floaters, Planned Amortization
Classes (PACs), Scheduled Classes (SCHs), Sequential Pay Classes (SEQs), Support
Classes (SUPs), Target Amortization Classes (TACs) and Accrual Classes (Z
Classes). CMO classes vary in the rate and time at which they receive principal
and interest payments. SEQs, also called plain vanilla, clean pay, or current
pay classes, sequentially receive principal payments from underlying mortgage
securities when the principal on a previous class has been completely paid off.
During the months prior to their receipt of principal payments, SEQs receive
interest payments at the coupon rate on their principal. PACs are designed to
produce a stable cash flow of principal payments over a predetermined period of
time. PACs guard against a certain level of prepayment risk by distributing
prepayments to SUPs, also called companion classes. TACs pay a targeted
principal payment schedule, as long as prepayments are not made at a rate slower
than an expected constant prepayment speed. If prepayments increase, the excess
over the target is paid to SUPs. SEQs may have a less stable cash flow than PACs
and TACs and, consequently, have a greater potential yield. PACs generally pay a
lower yield than TACs because of PACs' lower risk. Because SUPs are directly
affected by the rate of prepayment of underlying mortgages, SUPs may experience
volatile cash flow behavior. When prepayment speeds fluctuate, the average life
of a SUP will vary. SUPs, therefore, are priced at a higher yield than less
volatile classes of CMOs. Z Classes do not receive payments, including interest
payments, until certain other classes are paid off. At that time, the Z Class
begins to receive the accumulated interest and principal payments. A Floater has
a coupon rate that adjusts periodically (usually monthly) by adding a spread to
a benchmark index subject to a lifetime maximum cap. The yield of a Floater is
sensitive to prepayment rates and the level of the benchmark index.
Investment in MBSs poses several risks, including prepayment, market and credit
risks. Prepayment risk reflects the chance that borrowers may prepay their
mortgages faster than expected, thereby affecting the investment's average life
and perhaps its yield. Borrowers are most likely to exercise their prepayment
options at a time when it is least advantageous to investors, generally
prepaying mortgages as interest rates fall, and slowing payments as interest
rates rise. Certain classes of CMOs may have priority over others with respect
to the receipt of prepayments on the mortgages and the Fund may invest in CMOs
which are subject to greater risk of prepayment as discussed above. Market risk
reflects the chance that the price of the security may fluctuate over time. The
price of MBSs may be particularly sensitive to prevailing interest rates, the
length of time the security is expected to be outstanding and the liquidity of
the issue. In a period of unstable interest rates, there may be decreased demand
for certain types of MBSs, and a Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold. Credit risk reflects the chance that the Fund
may not receive all or part of its principal because the issuer or credit
enhancer has defaulted on its obligations. Obligations issued by U.S.
Government-related entities are guaranteed by the agency or instrumentality, and
some, such as GNMA certificates, are supported by the full faith and credit of
the U.S. Treasury; others are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the FNMA, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, are supported only by the credit of the
instrumentality. Although securities issued by U.S. Government-related agencies
are guaranteed by the U.S. Government, its agencies or instrumentalities, shares
of the Fund are not so guaranteed in any way. The performance of private label
MBSs, issued by private institutions, is based on the financial health of those
institutions.
ASSET-BACKED SECURITIES -- Certain of the Funds may also invest in "asset-backed
securities." These include secured debt instruments backed by automobile loans,
credit card loans, home equity loans, manufactured housing loans and other types
of secured loans providing the source of both principal and interest.
Asset-backed securities are subject to risks similar to those discussed above
with respect to MBSs.
REAL ESTATE SECURITIES -- High Yield Fund may invest in equity securities of
real estate investment trusts ("REITs") and other real estate industry companies
or companies with substantial real estate investments and therefore, such Fund
may be subject to certain risks associated with direct ownership of real estate
and with the real estate industry in general. These risks include, among others:
possible declines in the value of real estate; possible lack of availability of
mortgage funds; extended vacancies of properties; risks related to general and
local economic conditions; overbuilding; increases in competition, property
taxes and operating expenses; changes in zoning laws; costs resulting from the
clean-up of, and liability to third parties for damages resulting from,
environmental problems; casualty or condemnation losses; uninsured damages from
floods, earthquakes or other natural disasters; limitations on and variations in
rents; and changes in interest rates.
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs
invest the majority of their assets in real estate mortgages and derive income
from the collection of interest payments. REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Internal Revenue Code, as amended (the "Code"). Certain REITs may be
self-liquidating in that a specific term of existence is provided for in the
trust document. Such trusts run the risk of liquidating at an economically
inopportune time.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES -- Certain of the Funds may
purchase securities on a "when-issued" basis and may purchase or sell securities
on a "forward commitment" basis in order to hedge against anticipated changes in
interest rates and prices. The price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. When-issued securities and forward
commitments may be sold prior to the settlement date, but the Funds will enter
into when-issued and forward commitments only with the intention of actually
receiving or delivering the securities, as the case may be. No income accrues on
securities which have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery of the securities. If a Fund disposes of the
right to acquire a when-issued security prior to its acquisition or disposes of
its right to deliver or receive against a forward commitment, it may incur a
gain or loss. At the time a Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash or liquid
securities equal to the value of the when-issued or forward commitment
securities will be established and maintained with its custodian and will be
marked to market daily. There is a risk that the securities may not be delivered
and that the Fund may incur a loss.
OPTIONS AND FUTURES STRATEGIES--
WRITING COVERED CALL OPTIONS. Certain of the Funds may write (sell) covered call
options. Covered call options generally will be written on securities and
currencies which, in the opinion of the Investment Manager are not expected to
make any major price moves in the near future but which, over the long term, are
deemed to be attractive investments.
A call option gives the holder (buyer) the right to purchase a security or
currency at a specified price (the exercise price) at any time until a certain
date (the expiration date). So long as the obligation of the writer of a call
option continues, the writer may be assigned an exercise notice by the
broker/dealer through whom such option was sold, requiring it to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold. Writing covered call options is less
risky than writing uncovered or "naked" options, which the Funds will not do.
Portfolio securities on which call options may be written will be purchased
solely on the basis of investment considerations consistent with that Fund's
investment objectives. When writing a covered call option, the Fund in return
for the premium gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, a Fund has no control over when it may be required to sell
the underlying securities, since the option may be exercised at any time prior
to the option's expiration. If a call option which a Fund has written expires,
the Fund will realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying security during
the option period. If the call option is exercised, a Fund will realize a gain
or loss from the sale of the underlying security.
The premium which a Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium the Fund will receive from
writing a call option will reflect, among other things, the current market price
of the underlying security, the relationship of the exercise price to such
market price, the historical price volatility of the underlying security, and
the length of the option period. In determining whether a particular call option
should be written on a particular security, the Investment Manager will consider
the reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options. The premium received by a Fund
for writing covered call options will be recorded as a liability in the Fund's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be the latest sales price at the
time which the net asset value per share of the Fund is computed at the close of
regular trading on the NYSE (currently, 3:00 p.m. Central time, unless weather,
equipment failure or other factors contribute to an earlier closing time), or,
in the absence of such sale, the latest asked price. The liability will be
extinguished upon expiration of the option, the purchase of an identical option
in a closing transaction, or delivery of the underlying security upon the
exercise of the option.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
transaction will permit a Fund to write another call option on the underlying
security with either a different exercise price, expiration date or both. If the
Fund desires to sell a particular security from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security.
There is no assurance that the Fund will be able to effect such closing
transactions at favorable prices. If the Fund cannot enter into such a
transaction, it may be required to hold a security that it might otherwise have
sold, in which case it would continue to be at market risk with respect to the
security.
The Fund will pay transaction costs in connection with the writing of options
and in entering into closing purchase contracts. Transaction costs relating to
options activity normally are higher than those applicable to purchases and
sales of portfolio securities.
Call options written by the Fund normally will have expiration dates of less
than nine months from the date written. The exercise price of the options may be
below, equal to or above the current market values of the underlying securities
at the time the options are written. From time to time, the Fund may purchase an
underlying security for delivery in accordance with the exercise of an option,
rather than delivering such security from its portfolio. In such cases,
additional costs will be incurred.
The Fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more, respectively, than the premium
received from the writing of the option. Because increases in the market price
of a call option generally will reflect increases in the market price of the
underlying security, any loss resulting from the repurchase of a call option is
likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
PURCHASING CALL OPTIONS. Certain Funds may purchase call options. As the holder
of a call option, the Fund would have the right to purchase the underlying
security at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. Call options may be purchased by the Fund for the
purpose of acquiring the underlying security for its portfolio. Utilized in this
fashion, the purchase of call options would enable the Fund to acquire the
security at the exercise price of the call option plus the premium paid. At
times, the net cost of acquiring the security in this manner may be less than
the cost of acquiring the security directly. This technique also may be useful
to a Fund in purchasing a large block of securities that would be more difficult
to acquire by direct market purchases. So long as it holds such a call option
rather than the underlying security itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying security and in
such event could allow the call option to expire, incurring a loss only to the
extent of the premium paid for the option.
The Fund also may purchase call options on underlying securities it owns in
order to protect unrealized gains on call options previously written by it. A
call option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options also may be purchased at times to avoid realizing losses that would
result in a reduction of the Fund's current return. For example, the Fund has
written a call option on an underlying security having a current market value
below the price at which such security was purchased by the Fund, an increase in
the market price could result in the exercise of the call option written by the
Fund and the realization of a loss on the underlying security with the same
exercise price and expiration date as the option previously written.
Aggregate premiums paid for put and call options will not exceed 5% of the
Fund's total assets at the time of purchase.
WRITING COVERED PUT OPTIONS. Certain of the Funds may write covered put options.
A put option gives the purchaser of the option the right to sell, and the writer
(seller) the obligation to buy, the underlying security at the exercise price
during the option period. The option may be exercised at any time prior to its
expiration date. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
The Fund would write put options only on a covered basis, which means that the
Fund would either (i) set aside cash or liquid securities in an amount not less
than the exercise price at all times while the put option is outstanding (the
rules of the Options Clearing Corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price), (ii) sell short
the security underlying the put option at the same or higher price than the
exercise price of the put option, or (iii) purchase a put option, if the
exercise price of the purchased put option is the same or higher than the
exercise price of the put option sold by the Fund. The Fund generally would
write covered put options in circumstances where the Investment Manager wishes
to purchase the underlying security for the Fund's portfolio at a price lower
than the current market price of the security. In such event, the Fund would
write a put option at an exercise price which, reduced by the premium received
on the option, reflects the lower price it is willing to pay. Since the Fund
also would receive interest on debt securities maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price less the premiums received.
PURCHASING PUT OPTIONS. Certain of the Funds may purchase put options. As the
holder of a put option, the Fund would have the right to sell the underlying
security at the exercise price at any time during the option period. The Fund
may enter into closing sale transactions with respect to such options, exercise
them or permit them to expire.
The Fund may purchase a put option on an underlying security ("protective put")
owned by the Fund as a hedging technique in order to protect against an
anticipated decline in the value of the security. Such hedge protection is
provided only during the life of the put option when the Fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the Investment Manager deems it desirable to
continue to hold the security because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any capital gain
otherwise available for distribution when the security eventually is sold.
Certain Funds also may purchase put options at a time when the Fund does not own
the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction cost, unless the put option is sold in a closing sale transaction.
The premium paid by the Fund when purchasing a put option will be recorded as an
asset in the Fund's statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Fund is
computed (at the close of regular trading on the NYSE), or, in the absence of
such sale, the latest bid price. The asset will be extinguished upon expiration
of the option, the writing of an identical option in a closing transaction, or
the delivery of the underlying security upon the exercise of the option.
INTEREST RATE FUTURES CONTRACTS. Certain Funds may enter into interest rate
futures contracts ("Futures" or "Futures Contracts") as a hedge against changes
in prevailing levels of interest rates. A Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in interest rates,
and purchases of Futures as an offset against the effect of expected declines in
interest rates.
The Funds will not enter into Futures Contracts for speculation and will only
enter into Futures Contracts which are traded on national futures exchanges and
are standardized as to maturity date and underlying financial instrument. The
principal interest rate exchanges in the United States are the Board of Trade of
the City of Chicago and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"). Futures are exchanged in London at the London
International Financial Futures Exchange.
Although techniques other than sales and purchases of Futures Contracts could be
used to reduce a Fund's exposure to interest rate fluctuations, the Fund may be
able to hedge exposure more effectively and at a lower cost through using
Futures Contracts.
The Fund will not enter into a Futures Contract if, as a result thereof, more
than 5% of the Fund's total assets (taken at market value at the time of
entering into the contract) would be committed to "margin" (down payment)
deposits on such Futures Contracts.
A Futures Contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (debt
security) for a specified price at a designated date, time and place. Brokerage
fees are incurred when a Futures Contract is bought or sold, and margin deposits
must be maintained at all times the Futures Contract is outstanding.
Although Futures Contracts typically require future delivery of and payment for
financial instruments, Futures Contracts usually are closed out before the
delivery date. Closing out an open Futures Contract sale or purchase is effected
by entering into an offsetting Futures Contract purchase or sale, respectively,
for the same aggregate amount of the identical financial instrument and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it is more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular Futures Contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the Futures Contract.
Persons who trade in Futures Contracts may be broadly classified as "hedgers"
and "speculators." Hedgers, such as the Funds, whose business activity involves
investment or other commitment in securities or other obligations, use the
Futures markets primarily to offset unfavorable changes in value that may occur
because of fluctuations in the value of the securities and obligations held or
expected to be acquired by them. Debtors and other obligors also may hedge the
interest cost of their obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial instrument underlying
the Futures Contract, but, unlike the hedger, hopes to profit from fluctuations
in prevailing interest rates.
The Fund's Futures transactions will be entered into for traditional hedging
purposes; that is, Futures Contracts will be sold to protect against a decline
in the price of securities that the Fund owns, or Futures Contracts will be
purchased to protect the Fund against an increase in the price of securities it
has committed to purchase or expects to purchase.
"Margin" with respect to Futures Contracts is the amount of funds that must be
deposited by the Fund, in a segregated account with the Fund's broker, in order
to initiate Futures trading and to maintain the Fund's open positions in Futures
Contracts. A margin deposit made when the Futures Contract is entered into
("initial margin") is intended to assure the Fund's performance of the Futures
Contract. The margin required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded, and may be modified
significantly from time to time by the exchange during the term of the Futures
Contract. Futures Contracts customarily are purchased and sold on margins that
may range upward from less than 5% of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by increase in the case of a
sale or by decrease in the case of a purchase) so that the loss on the Futures
Contract reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin deposit ("margin
variation"). If the value of a position increases because of favorable price
changes in the Futures Contract so that the margin deposit exceeds the required
margin, however, the broker will pay the excess to the Fund. In computing daily
net asset values, the Fund will mark to market the current value of its open
Futures Contracts. The Fund expects to earn interest income on its margin
deposits.
MUNICIPAL BOND INDEX FUTURES CONTRACTS. The Municipal Bond Fund may enter into
municipal bond index futures contracts. A municipal bond index futures contract
is an agreement to take or make delivery of an amount of cash equal to the
difference between the value of the index at the beginning and at the end of the
contract period. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of securities.
RISKS OF USING FUTURES CONTRACTS. The prices of Futures Contracts are volatile
and are influenced, among other things, by actual and anticipated changes in
interest rates, which in turn are affected by fiscal and monetary policies and
national and international political and economic events.
There is a risk of imperfect correlation between changes in prices of Futures
Contracts and prices of the securities in the Fund's portfolio being hedged. The
degree of imperfection of correlation depends upon circumstances such as:
variations in speculative market demand for Futures and for debt securities,
including technical influences in Futures trading; and differences between the
financial instruments being hedged and the instruments underlying the standard
Futures Contracts available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of whether, when, and
how to hedge involves skill and judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of unexpected market behavior or interest
rate trends.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the Futures Contract is deposited as margin, a subsequent 10%
decrease in the value of the Futures Contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss of 150% of
the original margin deposit, if the Contract were closed out. Thus, a purchase
or sale of a Futures Contract may result in losses in excess of the amount
invested in the Futures Contract. However, the Fund presumably would have
sustained comparable losses if, instead of the Futures Contract, it had invested
in the underlying financial instrument and sold it after the decline.
Furthermore, in the case of a Futures Contract purchase, in order to be certain
that the Fund has sufficient assets to satisfy its obligations under a Futures
Contract, the Fund sets aside and commits to back the Futures Contract an amount
of cash and liquid securities equal in value to the current value of the
underlying instrument less margin deposit.
In the case of a Futures contract sale, the Fund either will set aside amounts,
as in the case of a Futures Contract purchase, own the security underlying the
contract or hold a call option permitting the Fund to purchase the same Futures
Contract at a price no higher than the contract price. Assets used as cover
cannot be sold while the position in the corresponding Futures Contract is open,
unless they are replaced with similar assets. As a result, the commitment of a
significant portion of the Fund's assets to cover could impede portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
Most U.S. Futures exchanges limit the amount of fluctuation permitted in Futures
Contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a Futures Contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of Futures Contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures Contract prices occasionally have moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of Futures positions and subjecting some
Futures traders to substantial losses.
OPTIONS ON FUTURES CONTRACTS. Options on Futures Contracts are similar to
options on securities except that options on Futures Contracts give the
purchaser the right, in return for the premium paid, to assume a position in a
Futures Contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell the Futures Contract,
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the Futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's Futures margin account which represents the
amount by which the market price of the Futures Contract, at exercise, exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the settlement will
be made entirely in cash equal to the difference between the exercise price of
the option and the closing level of the securities or index upon which the
Futures Contracts are based on the expiration date. Purchasers of options who
fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
As an alternative to purchasing call and put options on Futures, the Fund may
purchase call and put options on the underlying securities themselves. Such
options would be used in a manner identical to the use of options on Futures
Contracts.
To reduce or eliminate the leverage then employed by the Fund, or to reduce or
eliminate the hedge position then currently held by the Fund, the Fund may seek
to close out an option position by selling an option covering the same
securities or contract and having the same exercise price and expiration date.
Trading in options on Futures Contracts began relatively recently. The ability
to establish and close out positions on such options will be subject to the
development and maintenance of a liquid secondary market. It is not certain that
this market will develop.
INTEREST RATE SWAPS -- The Diversified Income Fund and the High Yield Fund may
enter into interest rate, total return and index swaps. The High Yield Fund may
also enter into the purchase or sale of related caps, floors and collars. A Fund
usually will enter into interest rate swaps on a net basis if the contract so
provides, that is, the two payment streams are netted out in a cash settlement
on the payment date or dates specified in the instrument, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as swaps, caps, floors and collars are entered into for good
faith hedging purposes, the Funds and the Investment Manager believe that they
do not constitute senior securities under the 1940 Act if appropriately covered
and, thus, will not treat them as being subject to a Fund's borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
derivative transaction unless, at the time of entering into the transaction, the
unsecured long-term debt rating of the counterparty combined with any credit
enhancements is rated at least A by Moody's or S&P or has an equivalent rating
from a nationally recognized statistical rating organization or is determined to
be of equivalent credit quality by the Investment Manager. If a counterparty
defaults, a Fund may have contractual remedies pursuant to the agreements
related to the transactions. The swap market has grown substantially in recent
years, with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
EMERGING COUNTRIES -- Certain of the Funds may invest in debt securities in
emerging markets. Investing in securities in emerging countries may entail
greater risks than investing in debt securities in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; and
(v) the absence of developed structures governing private or foreign investment
or allowing for judicial redress for injury to private property.
FOREIGN INVESTMENT RESTRICTIONS -- Certain countries prohibit or impose
substantial restrictions on investments in their capital markets, particularly
their equity markets, by foreign entities such as the Funds. As illustrations,
certain countries require governmental approval prior to investments by foreign
persons, or limit the amount of investment by foreign persons in a particular
company, or limit the investments by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation, as well as by the application to it of
other restrictions on investments.
POLITICAL AND ECONOMIC RISKS -- Investing in securities of non-U.S. companies
may entail additional risks due to the potential political and economic
instability of certain countries and the risks of expropriation,
nationalization, confiscation or the imposition of restrictions on foreign
investment and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, a Fund
could lose its entire investment in any such country.
An investment in a Fund which invests in non-U.S. companies is subject to the
political and economic risks associated with investments in foreign markets.
Even though opportunities for investment may exist in emerging markets, any
change in the leadership or policies of the governments of those countries or in
the leadership or policies of any other government which exercises a significant
influence over those countries, may halt the expansion of or reverse the
liberalization of foreign investment policies now occurring and thereby
eliminate any investment opportunities which may currently exist.
Investors should note that upon the accession to power of authoritarian regimes,
the governments of a number of emerging market countries previously expropriated
large quantities of real and personal property similar to the property which
will be represented by the securities purchased by a Fund. The claims of
property owners against those governments were never finally settled. There can
be no assurance that any property represented by securities purchased by a Fund
will not also be expropriated, nationalized, or otherwise confiscated. If such
confiscation were to occur, the Fund could lose a substantial portion of its
investments in such countries. The Fund's investments would similarly be
adversely affected by exchange control regulation in any of those countries.
RELIGIOUS AND ETHNIC INSTABILITY -- Certain countries in which a Fund may invest
may have vocal minorities that advocate radical religious or revolutionary
philosophies or support ethnic independence. Any disturbance on the part of such
individuals could carry the potential for widespread destruction or confiscation
of property owned by individuals and entities foreign to such country and could
cause the loss of the Fund's investment in those countries.
NON-UNIFORM CORPORATE DISCLOSURE STANDARDS AND GOVERNMENTAL REGULATION --
Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by a Fund will not be
registered with the SEC or regulators of any foreign country, nor will the
issuers thereof be subject to the SEC's reporting requirements. Thus, there will
be less available information concerning foreign issuers of securities held by
the Fund than is available concerning U.S. issuers. In instances where the
financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, the Investment Manager will take appropriate
steps to evaluate the proposed investment, which may include on-site inspection
of the issuer, interviews with its management and consultations with
accountants, bankers and other specialists. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. Government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers.
ADVERSE MARKET CHARACTERISTICS -- Securities of many foreign issuers may be less
liquid and their prices more volatile than securities of comparable U.S.
issuers. In addition, foreign securities exchanges and brokers generally are
subject to less governmental supervision and regulation than in the U.S., and
foreign securities exchange transactions usually are subject to fixed
commissions, which generally are higher than negotiated commissions on U.S.
transactions. In addition, foreign securities exchange transactions may be
subject to difficulties associated with the settlement of such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are uninvested and no return is earned thereon. The inability of the Fund to
make intended security purchases due to settlement problems could cause it to
miss attractive opportunities. Inability to dispose of a portfolio security due
to settlement problems either could result in losses to the Fund due to
subsequent declines in value of the portfolio security or, if the Fund has
entered into a contract to sell the security, could result in possible liability
to the purchaser. The Investment Manager will consider such difficulties when
determining the allocation of the Fund's assets.
NON-U.S. WITHHOLDING TAXES -- A Fund's investment income and gains from foreign
issuers may be subject to non-U.S. withholding and other taxes, thereby reducing
the Fund's investment income and gains.
COSTS -- Investors should understand that the expense ratio of the Funds that
invest in foreign securities can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the Funds
are higher.
EASTERN EUROPE -- Changes occurring in Eastern Europe and Russia today could
have long-term potential consequences. As restrictions fall, this could result
in rising standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment in the countries
of Eastern Europe and Russia is highly speculative at this time. Political and
economic reforms are too recent to establish a definite trend away from
centrally-planned economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or formal market for
securities. Such countries may also have government exchange controls,
currencies with no recognizable market value relative to the established
currencies of western market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking and securities
infrastructure to handle such trading, and a legal tradition which does not
recognize rights in private property. In addition, these countries may have
national policies which restrict investments in companies deemed sensitive to
the country's national interest.
AMERICAN DEPOSITARY RECEIPTS (ADRS) -- The High Yield Fund may invest in ADRs.
ADRs are dollar-denominated receipts issued generally by U.S. banks and which
represent the deposit with the bank of a foreign company's securities. ADRs are
publicly traded on exchanges or over-the-counter in the United States. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies of foreign nations, which are in addition to the
usual risks inherent in domestic investments. See "Foreign Investment
Restrictions," above.
INVESTMENT POLICY LIMITATIONS
Each of the Funds operate within certain fundamental policies. These fundamental
policies may not be changed without the approval of the lesser of (i) 67% or
more of the Fund's shares present at a meeting of shareholders if the holders of
more than 50% of the outstanding shares of the Fund are present or represented
by proxy, or (ii) more than 50% of a Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors without shareholder approval. Any investment
restrictions that involve a maximum percentage of securities or assets shall not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets of,
or borrowings by, the Fund. Calculation of the Fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the Fund's Prospectus or Statement of
Additional Information will not include cash collateral held in connection with
a Fund's securities lending activities.
FUNDAMENTAL POLICIES -- The fundamental policies of the Funds are:
1. PERCENT LIMIT ON ASSETS INVESTED IN ANY ONE ISSUER. Not to invest more than
5% of its total assets in the securities of any one issuer (other than
obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities); provided, that this limitation applies only with respect
to 75% of a Fund's total assets.
2. PERCENT LIMIT ON SHARE OWNERSHIP OF ANY ONE ISSUER. Not to purchase a
security if, as a result, with respect to 75% of the value of the Fund's
total assets, more than 10% of the outstanding voting securities of any one
issuer would be held by the Fund (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
3. UNDERWRITING. Not to act as underwriter of securities issued by others,
except to the extent that a Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of restricted
securities.
4. INDUSTRY CONCENTRATION. Not to invest in an amount equal to, or in excess
of, 25% or more of the Fund's total assets in a particular industry (other
than securities of the U.S. Government, its agencies or instrumentalities).
5. REAL ESTATE. Not to purchase or sell real estate unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent
a Fund from investing in securities or other instruments backed by real
estate or securities of companies engaged in the real estate business).
6. COMMODITIES. Not to purchase or sell physical commodities, except that a
Fund may enter into futures contracts and options thereon.
7. LOANS. Not to lend any security or make any other loan if, as a result, more
than 33 1/3% of a Fund's total assets would be lent to other parties, except
(i) through the purchase of a portion of an issue of debt securities in
accordance with its investment objective and policies, or (ii) by engaging
in repurchase agreements with respect to portfolio securities.
8. BORROWING. Not to borrow in excess of 33 1/3% of the Fund's total assets.
9. SENIOR SECURITIES. Not to issue senior securities, except as permitted under
the Investment Company Act of 1940.
MUNICIPAL BOND FUND. The following fundamental policy applies only to Municipal
Bond Fund:
10. TAX-EXEMPT SECURITIES. Not to invest less than 80% of its assets in
securities which are exempt from regular federal income tax but which may be
subject to alternative minimum tax, except for temporary defensive purposes.
The Diversified Income and High Yield Funds interpret Fundamental Policy (5) to
prohibit the purchase of real estate limited partnerships.
For purposes of Fundamental Policies (2) and (4) above, each governmental
subdivision, i.e., state, territory, possession of the United States or any
political subdivision of any of the foregoing, including agencies, authorities,
instrumentalities, or similar entities, or of the District of Columbia shall be
considered a separate issuer if its assets and revenues are separate from those
of the governmental body creating it and the security is backed only by its own
assets and revenues. Further, in the case of an industrial development bond, if
the security is backed only by the assets and revenues of a non-governmental
user, then such non-governmental user will be deemed to be the sole issuer. If
an industrial development bond or government issued security is guaranteed by a
governmental or other entity, such guarantee would be considered a separate
security issued by the guarantor.
For Cash Fund, Fundamental Policy (4) does not apply to investment in bank
obligations.
OPERATING POLICIES -- The operating policies of the Funds are:
1. LOANS. The Funds may not lend assets other than securities to other parties.
(This limitation does not apply to purchases of debt securities or to
repurchase agreements.)
2. BORROWING. The Funds may not borrow money or securities for any purposes
except that borrowing up to 10% of the Fund's total assets from commercial
banks is permitted for emergency or temporary purposes. Cash Fund may not
purchase securities while borrowings equal to 5% or more of its total assets
are outstanding.
3. OPTIONS. The Funds, other than Cash Fund, may buy and sell exchange-traded
and over-the-counter put and call options, including index options,
securities options, currency options and options on futures, provided that a
call or put may be purchased only if after such purchase, the value of all
call and put options held by the Fund will not exceed 5% of the Fund's total
assets. The Funds may write only covered put and call options. Cash Fund
will not invest in puts, calls, or any combination thereof.
4. OIL AND GAS PROGRAMS. The Funds may not invest in oil, gas, mineral leases
or other mineral exploration or development programs.
5. INVESTMENT COMPANIES. Except in connection with a merger, consolidation,
acquisition, or reorganization, the Funds may not invest in securities of
other investment companies, except in compliance with the Investment Company
Act of 1940.
DIVERSIFIED INCOME, HIGH YIELD AND CASH FUNDS. The following operating policies
apply only to the foregoing Funds:
6. OPERATING HISTORY. The Funds may not invest in securities of an issuer that,
together with any predecessor, has been in operation for less than three
years if, as a result, more than 5% of the total assets of the Fund would
then be invested in such securities; provided that this operating policy
does not apply to High Yield Fund.
7. CONTROL OF PORTFOLIO COMPANIES. The Funds may not invest in companies for
the purpose of exercising management or control.
MUNICIPAL BOND AND CASH FUNDS. The following operating policies apply only to
Municipal Bond and Cash Funds:
8. SHORT SALES. The Funds may not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the
securities sold short, and provided that transactions in futures contracts
and options are not deemed to constitute selling securities short.
9. MARGIN. The Funds do not intend to purchase securities on margin, except
that the Funds may obtain such short-term credits as are necessary for the
clearance of transactions, and provided that margin payments in connection
with futures contracts and options on futures contracts shall not constitute
purchasing securities on margin.
CASH FUND. The following operating policies apply only to Cash Fund:
10. PERMISSIBLE SECURITIES. Cash Fund may not purchase securities other than
U.S. Government securities, bank obligations and corporate obligations.
11. FUTURES. Cash Fund may not purchase futures contracts or options thereon.
OFFICERS AND DIRECTORS
The officers and directors of the Funds and their principal occupations for at
least the last five years are as follows. Unless otherwise noted, the address of
each officer and director is 700 SW Harrison Street, Topeka, Kansas 66636-0001.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John D. Cleland,* 64 Chairman of the Board Senior Vice President and Managing Member
(Birth date: May 1, 1936) and Director Representative, Security Management Company, LLC;
Senior Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Donald A. Chubb, Jr.,** 53 Director Business broker, Griffith & Blair Realtors. Prior to
(Birth date: December 14, 1946) 1997, President, Neon Tube Light Company, Inc
2222 SW 29th Street
Topeka, Kansas 66611
------------------------------------------------------------------------------------------------------------------------------------
Penny A. Lumpkin,** 60 Director Owner, Vivian's Gift Shop (Corporate Retail); Vice
(Birth date: August 20, 1939) President, Palmer Companies, Inc. (Small Business and
3616 Canterbury Town Road Shopping Center Development) and Bellairre Shopping
Topeka, Kansas 66610 Center LLC (Managing and Leasing); Partner, Goodwin
Enterprises (Retail). Prior to 1999, Vice President and
Treasurer, Palmer News, Inc.; Vice President, M/S News,
Ind. and Secretary, Kansas City Periodicals.
------------------------------------------------------------------------------------------------------------------------------------
Mark L. Morris, Jr.,** 66 Director Veterinary Nutrition Consultant; Independent Investor,
(Birth date: February 3, 1934) Morris Co. (Personal Investments). Former General Partner,
5500 SW 7th Street Mark Morris Associates (Veterinary Research and Education)
Topeka, Kansas 66606 Research and Education)
------------------------------------------------------------------------------------------------------------------------------------
Maynard Oliverius, 56 Director President and Chief Executive Officer,
(Birth date: December 18, 1943) Stormont-Vail HealthCare
1500 SW 10th Avenue
Topeka, Kansas 66604
------------------------------------------------------------------------------------------------------------------------------------
James R. Schmank,* 47 Director and President President and Managing Member Representative, Security
(Birth date: February 21, 1953) Management Company, LLC; Senior Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company
------------------------------------------------------------------------------------------------------------------------------------
Amy J. Lee, 38 Secretary Secretary, Security Management Company, LLC; Vice
(Birth date: June 5, 1961) President, Associate General Counsel and Assistant
Secretary, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Brenda M. Harwood, 36 Treasurer Assistant Vice President and Treasurer, Security
(Birth date: November 3, 1963) Management Company, LLC; Assistant Vice President,
Security Benefit Group, Inc. and Security Benefit
Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Steven M. Bowser, 40 Vice President Vice President and Portfolio Manager, Security
(Birth date: February 11, 1960) (Income Fund) Management Company, LLC; Vice President, Security Benefit
Group, Inc. and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Swank, 40 Vice President Senior Vice President and Portfolio Manager, Security
(Birth date: January 10, 1960) (Income Fund) Management Company, LLC; Senior Vice President and Chief
Investment Officer, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Christopher D. Swickard, 34 Assistant Secretary Assistant Secretary, Security Management Company, LLC;
(Birth date: October 9, 1965) Assistant Vice President and Assistant Counsel, Security
Benefit Group, Inc. and Security Benefit Life Insurance
Company
------------------------------------------------------------------------------------------------------------------------------------
<FN>
*These directors are deemed to be "interested persons" of the Fund.
**These directors serve on the Fund's audit committee, the purpose of which (among other things) is to meet with independent
auditors, to review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting
function for the Fund.
</FN>
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The officers of the Funds hold identical offices with each of the other Funds
managed by the Investment Manager, except Messrs. Bowser and Swank, who are also
Vice Presidents of SBL Fund. The directors of the Funds also serve as directors
of each of the other Funds managed by the Investment Manager. See the table
under "Investment Management," page 35, for positions held by such persons with
the Investment Manager. Ms. Lee holds identical offices for the Distributor
(Security Distributors, Inc.). Messrs. Cleland, Schmank and Young are also
directors. Mr. Cleland is Vice President, and Ms. Harwood is Treasurer of the
Distributor.
REMUNERATION OF DIRECTORS AND OTHERS
The Funds' directors, except those directors who are "interested persons" of the
Funds, receive from each Fund an annual retainer of $2,000 and a fee of $2,500
per meeting, plus reasonable travel costs, for each meeting of the board
attended. In addition, certain directors who are members of the Funds' joint
audit committee receive a fee of $1,500 per meeting and reasonable travel costs
for each meeting of the Funds' audit committee attended. The meeting fee
(including the audit committee meeting) and travel costs are paid
proportionately by each of the seven registered investment companies to which
the Adviser provides investment advisory services (collectively, the "Security
Fund Complex") based on the Fund's net assets.
The Funds do not pay any fees to, or reimburse expenses of, their directors who
are considered "interested persons" of the Fund. The aggregate compensation paid
by the Fund to each of the directors during the fiscal year ended December 31,
1999, and the aggregate compensation paid to each of the directors during
calendar year 1999 by the Security Fund Complex, are set forth in the
accompanying chart. Each of the directors is a director of each of the other
registered investment companies in the Security Fund Complex.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
PENSION OR RETIREMENT
NAME OF DIRECTOR BENEFITS ACCRUED AS
OF THE FUND AGGREGATE COMPENSATION PART OF FUND EXPENSES ESTIMATED TOTAL COMPENSATION
-------------------------------- -------------------------------- ANNUAL FROM THE SECURITY
INCOME MUNICIPAL INCOME MUNICIPAL BENEFITS UPON FUND COMPLEX,
FUND BOND FUND CASH FUND FUND BOND FUND CASH FUND RETIREMENT INCLUDING THE FUNDS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Donald A. Chubb, Jr. $2,542 $2,542 $2,542 $0 $0 $0 $0 $30,500
John D. Cleland 0 0 0 0 0 0 0 0
Penny A. Lumpkin 2,458 2,458 2,458 0 0 0 0 29,500
Mark L. Morris, Jr. 2,542 2,542 2,542 0 0 0 0 30,500
Maynard Oliverius 2,542 2,542 2,542 0 0 0 0 30,500
James R. Schmank 0 0 0 0 0 0 0 0
Harold G. Worswick* 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------------------
*Mr. Worswick, formerly a director of the Security Funds, received deferred compensation in the amount of $8,386 during the year
ended December 31, 1999.
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of March 31, 2000, the Funds' officers and directors (as a group)
beneficially owned less than 1% of the total outstanding Class A shares of
Diversified Income, High Yield and Municipal Bond Funds. Cash Fund's officers
and directors (as a group) beneficially owned less than 1% of the total
outstanding shares as of March 31, 2000. None of the Funds' officers or
directors owned Class B shares of the Funds.
PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 2000, Security Benefit Group, Inc. ("SBG"), 700 SW Harrison
Street, Topeka, Kansas, 66636-0001, owned, of record and beneficially, 27% of
the voting securities of High Yield Fund (46% of the total outstanding Class A
shares and 71% of the total outstanding Class B shares). SBG's percentage
ownership of High Yield Fund may permit SBG to effectively control the outcome
of any matters submitted to a vote of shareholders of these two funds. SBG is an
insurance and financial services holding company wholly-owned by Security
Benefit Life Insurance Company ("SBL"), 700 SW Harrison Street, Topeka, Kansas
66636-0001. SBG and SBL are incorporated under the laws of Kansas. SBG is
ultimately controlled by Security Benefit Mutual Holding Company, 700 SW
Harrison Street, Topeka, Kansas 66636-0001, a mutual holding company organized
under the laws of Kansas.
As of March 31, 2000, the following entities owned, of record and beneficially,
5% or more of a class of a Fund's outstanding securities:
--------------------------------------------------------------------------------
FUND CLASS PERCENTAGE
NAME OF STOCKHOLDER OWNED OWNED OWNED
-------------------------------------------------------------------------------
SBL Diversified Income Class A 11.1
High Yield Class A 16.6
-------------------------------------------------------------------------------
SBG High Yield Class A 45.5
High Yield Class B 70.7
-------------------------------------------------------------------------------
Oklahoma Co. Employee Diversified Income Class A 20.8
Retirement Fund
-------------------------------------------------------------------------------
Capitol Federal Diversified Income Class A 17.9
Foundation
-------------------------------------------------------------------------------
Sisters of St. Francis High Yield Class A 11.1
Ministry Fund
-------------------------------------------------------------------------------
William R. McDonough,
Ttee, David N. Fletcher, High Yield Class B 7.1
Rev. Trust B/U/A 5/29/98
--------------------------------------------------------------------------------
Margaret C. Lyddon and
Nancy Lyddon Sutherland Municipal Bond Class B 13.4
Trste, Margaret C. Lyddon
Trust dtd 11/24/97
--------------------------------------------------------------------------------
Eugene Vernon Speakes
Trste and Mary Rebecca Municipal Bond Class B 9.9
Speakes Trste, Speakes
Living Trust dtd 2/26/86
--------------------------------------------------------------------------------
Thomas A. Irvine and Municipal Bond Class B 13.1
Regina A. Irvine
--------------------------------------------------------------------------------
Nelva Jo Davis, Trste, NJT Municipal Bond Class B 5.9
Trust Number 1 dtd 3/24/97
--------------------------------------------------------------------------------
Ollie M. Boyer Municipal Bond Class B 7.4
--------------------------------------------------------------------------------
Dorothy Kalomiris Ttee,
Dorothy Kalomiris Rev. Municipal Bond Class B 5.0
Trust U/A 10/23/93
--------------------------------------------------------------------------------
Bernice B. Schickling Municipal Bond Class B 29.2
--------------------------------------------------------------------------------
HOW TO PURCHASE SHARES
As discussed below, shares of Diversified Income, High Yield and Municipal Bond
Funds may be purchased with either a front-end or contingent deferred sales
charge. Shares of Cash Fund are offered by the Fund without a sales charge. Each
of the Funds reserves the right to withdraw all or any part of the offering made
by this Prospectus and to reject purchase orders.
As a convenience to investors and to save operating expenses, the Funds do not
issue certificates for Fund shares except upon written request by the
stockholder.
DIVERSIFIED INCOME, HIGH YIELD AND MUNICIPAL BOND FUNDS -- Security
Distributors, Inc. (the "Distributor"), 700 SW Harrison, Topeka, Kansas, a
wholly-owned subsidiary of Security Benefit Group, Inc., is principal
underwriter for Diversified Income, High Yield and Municipal Bond Funds.
Investors may purchase shares of these Funds through authorized dealers who are
members of the National Association of Securities Dealers, Inc. In addition,
banks and other financial institutions may make shares of the Funds available to
their customers. (Banks and other financial institutions that make shares of the
Funds available to their customers in Texas must be registered with that state
as securities dealers.) The minimum initial purchase must be $100 and subsequent
purchases must be $100 unless made through an Accumulation Plan which allows a
minimum initial purchase of $100 and subsequent purchases of $20. (See
"Accumulation Plan," page 34.) An application may be obtained from the
Distributor.
Orders for the purchase of shares of the Funds will be confirmed at an offering
price equal to the net asset value per share next determined after receipt of
the order in proper form by the Distributor (generally as of the close of the
Exchange on that day) plus the sales charge in the case of Class A shares of the
Funds. Orders received by dealers or other firms prior to the close of the
Exchange and received by the Distributor prior to the close of its business day
will be confirmed at the offering price effective as of the close of the
Exchange on that day. Dealers and other financial services firms are obligated
to transmit orders promptly.
ALTERNATIVE PURCHASE OPTIONS -- Diversified Income Fund and High Yield Fund
offer three classes of shares, Class A, Class B and Class C. Municipal Bond Fund
offers two classes of shares, Class A and Class B.
CLASS A SHARES -- FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge of 1% for one year). See Appendix A for a discussion of "Rights of
Accumulation" and "Statement of Intention," which options may serve to reduce
the front-end sales charge.
CLASS B SHARES -- BACK-END LOAD OPTION. Class B shares are sold without a sales
charge at the time of purchase, but are subject to a deferred sales charge if
they are redeemed within five years of the date of purchase. Class B shares will
automatically convert tax-free to Class A shares at the end of eight years after
purchase.
CLASS C SHARES -- LEVEL LOAD OPTION. Class C shares are sold without a sales
charge at the time of purchase, but are subject to a contingent deferred sales
charge if they are redeemed within one year of the date of purchase.
The decision as to which class is more beneficial to an investor depends on the
amount and intended length of the investment. Investors who would rather pay the
entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B or Class C shares, in which case 100% of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment.
Dealers or others receive different levels of compensation depending on which
class of shares they sell.
CLASS A SHARES -- Class A shares of Diversified Income, High Yield and Municipal
Bond Funds are offered at net asset value plus an initial sales charge as
follows:
--------------------------------------------------------------------------------
SALES CHARGE
---------------------------------------------------
APPLICABLE
AMOUNT OF PERCENTAGE PERCENTAGE OF PERCENTAGE
PURCHASE AT OF OFFERING NET AMOUNT REALLOWABLE
OFFERING PRICE PRICE INVESTED TO DEALERS
--------------------------------------------------------------------------------
Less than $50,000 ............ 4.75% 4.99% 4.00%
$50,000 but less
than $100,000 ............. 3.75 3.90 3.00
$100,000 but less
than $250,000 ............. 2.75 2.83 2.20
$250,000 but less
than $1,000,000 ........... 1.75 1.78 1.40
$1,000,000 or more ........... None None (See below)
--------------------------------------------------------------------------------
Purchases of Class A shares of these Funds in amounts of $1,000,000 or more are
at net asset value (without a sales charge), but are subject to a contingent
deferred sales charge of 1% in the event of redemption within one year following
purchase. For a discussion of the contingent deferred sales charge, see
"Calculation and Waiver of Contingent Deferred Sales Charges" page 32. The
Distributor will pay a commission to dealers on purchases of $1,000,000 or more
as follows: 1.00% on sales up to $5,000,000, plus .50% on sales of $5,000,000 or
more up to $10,000,000, and .10% on any amount of $10,000,000 or more. The
Underwriter may also pay a commission of up to 1% to dealers who initiate or are
responsible for purchases of $500,000 or more by certain retirement plans as
described under "Purchases at Net Asset Value" in the prospectus. Such purchases
may be subject to a deferred sales charge of up to 1% in the event of a
redemption within one year of the purchase.
SECURITY INCOME AND MUNICIPAL BOND FUNDS' CLASS A DISTRIBUTION PLANS -- As
discussed in the Prospectus, each of Diversified Income, High Yield and
Municipal Bond Funds has a Distribution Plan for its Class A shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940. Each Plan authorizes these
Funds to pay an annual fee to the Distributor of .25% of the average daily net
asset value of the Class A shares of each Fund to finance various activities
relating to the distribution of such shares of the Funds to investors. These
expenses include, but are not limited to, the payment of compensation (including
compensation to securities dealers and other financial institutions and
organizations) to obtain various administrative services for each Fund. These
services include, among other things, processing new shareholder account
applications and serving as the primary source of information to customers in
answering questions concerning each Fund and their transactions with the Fund.
The Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
each Fund. The Distributor is required to report in writing to the Board of
Directors of Income Fund and the board will review at least quarterly the
amounts and purpose of any payments made under the Plan. The Distributor is also
required to furnish the board with such other information as may reasonably be
requested in order to enable the board to make an informed determination of
whether the Plan should be continued.
For Income Fund, the Plan became effective on August 15, 1985, as to Diversified
Income Fund and was adopted with respect to the High Yield Fund on May 3, 1996.
For Municipal Bond Fund, the Plan became effective on May 1, 1998. Each Plan
will continue from year to year, provided that such continuance is approved at
least annually by a vote of a majority of the Board of Directors of each Fund,
including a majority of the independent directors cast in person at a meeting
called for the purpose of voting on such continuance. The Plan can also be
terminated at any time on 60 days' written notice, without penalty, if a
majority of the disinterested directors or the Class A shareholders vote to
terminate the Plan. Any agreement relating to the implementation of the Plan
terminates automatically if it is assigned. The Plans may not be amended to
increase materially the amount of payments thereunder without approval of the
Class A shareholders of the Funds.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Investment Manager and its officers, directors and employees,
including Messrs. Cleland and Schmank (directors of the Fund) and Ms. Lee and
Ms. Harwood (officers of the Fund), all may be deemed to have a direct or
indirect financial interest in the operation of the Distribution Plan. None of
the independent directors has a direct or indirect financial interest in the
operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Funds and their
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
Diversified Income, High Yield and Municipal Bond Funds' net assets from sales
pursuant to its Distribution Plan and Agreement may benefit shareholders by
reducing per share expenses, permitting increased investment flexibility and
diversification of the Fund's assets, and facilitating economies of scale (E.G.,
block purchases) in the Fund's securities transactions.
Distribution fees paid by Class A stockholders of Diversified Income and High
Yield Funds to the Distributor under the Plan for the year ended December 31,
1999 totaled $190,939. In addition, $118,632 was carried forward from the
previous plan year. Approximately $102,939 of this amount was paid as a service
fee to broker/dealers and $118,487 was spent on promotions, resulting in a carry
forward amount of $88,145 going into the 2000 plan year. The amount spent on
promotions consists primarily of amounts reimbursed to dealers for expenses
(primarily travel, meals and lodging) incurred in connection with attendance by
their representatives at educational meetings concerning Diversified Income and
High Yield Funds. The Distributor may engage the services of an affiliated
advertising agency for advertising, preparation of sales literature and other
distribution-related activities.
CLASS B SHARES -- Class B shares of Diversified Income, High Yield and Municipal
Bond Funds are offered at net asset value, without an initial sales charge. With
certain exceptions, these Funds may impose a deferred sales charge on shares
redeemed within five years of the date of purchase. No deferred sales charge is
imposed on amounts redeemed thereafter. If imposed, the deferred sales charge is
deducted from the redemption proceeds otherwise payable to the stockholder. The
deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the stockholder made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
--------------------------------------------------
YEAR SINCE PURCHASE CONTINGENT DEFERRED
PAYMENT WAS MADE SALES CHARGE
--------------------------------------------------
First 5%
Second 4%
Third 3%
Fourth 3%
Fifth 2%
Sixth and Following 0%
--------------------------------------------------
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions with respect to Class B shares) will automatically
convert on the eighth anniversary of the date such shares were purchased to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the Investment
Manager.) All shares purchased through reinvestment of dividends and other
distributions with respect to Class B shares ("reinvestment shares") will be
considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Funds' opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN -- Each of Diversified Income, High Yield and
Municipal Bond Funds bear some of the costs of selling its Class B shares under
a Distribution Plan adopted with respect to its Class B shares ("Class B
Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 ("1940 Act"). This Plan was adopted by the Board of Directors of
Diversified Income and Municipal Bond Funds on July 23, 1993. The Plan was
adopted with respect to the High Yield Fund on May 3, 1996. The Plan provides
for payments at an annual rate of 1.00% of the average daily net asset value of
Class B shares. Amounts paid by the Funds are currently used to pay dealers and
other firms that make Class B shares available to their customers (1) a
commission at the time of purchase normally equal to 4.00% of the value of each
share sold and (2) a service fee payable for the first year, initially, and for
each year thereafter, quarterly, in an amount equal to .25% annually of the
average daily net asset value of Class B shares sold by such dealers and other
firms and remaining outstanding on the books of the Funds.
Rules of the National Association of Securities Dealers, Inc. ("NASD") limit the
aggregate amount that each Fund may pay annually in distribution costs for the
sale of its Class B shares to 6.25% of gross sales of Class B shares since the
inception of the Distribution Plan, plus interest at the prime rate plus 1% on
such amount (less any contingent deferred sales charges paid by Class B
shareholders to the Distributor). The Distributor intends, but is not obligated,
to continue to pay or accrue distribution charges incurred in connection with
the Class B Distribution Plan which exceed current annual payments permitted to
be received by the Distributor from the Funds. The Distributor intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Funds would be within permitted limits.
Each Fund's Class B Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class B shares. In the event the
Class B Distribution Plan is terminated by the Class B stockholders or the
Funds' Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses incurred
by the Distributor in excess of those payments would be absorbed by the
Distributor. Distribution fees paid by Class B stockholders of Diversified
Income, High Yield and Municipal Bond Funds to the Distributor under the Plan
for the year ended December 31, 1999, totaled $205,030. The Funds make no
payments in connection with the sales of their Class B shares other than the
distribution fee paid to the Distributor.
CLASS C SHARES -- Class C shares are offered at net asset value, without an
initial sales charge. With certain exceptions, the Funds may impose a deferred
sales charge on shares redeemed within one year of the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
to you. The deferred sales charge is retained by the Distributor.
CLASS C DISTRIBUTION PLAN -- Diversified Income Fund and High Yield Fund bear
some of the costs of selling its Class C shares under a Distribution Plan
adopted with respect to its Class C shares ("Class C Distribution Plan")
pursuant to Rule 12b-1 under the 1940 Act. This Plan provides for payments at an
annual rate of 1.00% of the average daily net asset value of Class C shares.
Amounts paid by the Fund are currently used to pay dealers and other firms that
make Class C shares available to their customers (1) a commission at the time of
purchase normally equal to .75% of the value of each share sold, and for each
year thereafter, quarterly, in an amount equal to .75% annually of the average
daily net asset value of Class C shares sold by such dealers and other firms and
remaining outstanding on the books of the Fund and (2) a service fee payable for
the first year initially, and for each year thereafter, quarterly, in an amount
equal to .25% annually of the average daily net asset value of Class C shares
sold by such dealers and other firms and remaining outstanding on the books of
the Fund.
Rules of the NASD limit the aggregate amount that a Fund may pay annually in
distribution costs for the sale of its Class C shares to 6.25% of gross sales of
Class C shares since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amount (less any contingent deferred sales
charges paid by Class C shareholders to the Distributor). The Distributor
intends, but is not obligated, to continue to pay or accrue distribution charges
incurred in connection with the Class C Distribution Plan which exceed current
annual payments permitted to be received by the Distributor from the Funds. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Funds would be within
permitted limits.
The Fund's Class C Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class C shares. In the event the
Class C Distribution Plan is terminated by the Class C stockholders or the
Fund's Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses incurred
by the Distributor in excess of those payments would be absorbed by the
Distributor. The Fund makes no payments in connection with the sales of their
shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- Any contingent
deferred sales charge imposed upon redemption of Class A shares (purchased in an
amount of $1,000,000 or more) and Class B shares and Class C shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in an amount of $1,000,000
or more) or Class C shares held for more than one year or Class B shares held
for more than five years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death, (2) upon the
disability (as defined in Section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
CDSC), (iv) "financial hardship" of a participant in the plan, as that term is
defined in Treasury Regulation Section 1.401(k)-1(d)(2), as amended from time to
time, (v) termination of employment of a participant in the plan, (vi) any other
permissible withdrawal under the terms of the plan. The contingent deferred
sales charge will also be waived in the case of certain redemptions of Class B
shares of the Funds pursuant to a systematic withdrawal program (See "Systematic
Withdrawal Program," page 34).
ARRANGEMENTS WITH BROKER/DEALERS AND OTHERS -- The Investment Manager or
Distributor, from time to time, will pay a bonus to certain dealers whose
representatives have sold or are expected to sell significant amounts of the
Funds and/or certain other Funds managed by the Investment Manager. Bonus
compensation may include reallowance of the entire sales charge and may also
include, with respect to Class A shares, an amount which exceeds the entire
sales charge and, with respect to Class B shares or Class C shares, an amount
which exceeds the maximum commission. The Distributor, or the Investment
Manager, may also provide financial assistance to certain dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising, sales campaigns, and/or shareholder services and
programs regarding one or more of the funds managed by the Investment Manager.
Certain of the bonuses may be financed by payments to the Distributor under a
Rule 12b-1 Distribution Plan. The payment of bonuses will not change the price
an investor will pay for shares or the amount that the Funds will receive from
such sale. No compensation will be offered to the extent it is prohibited by the
laws of any state or self-regulatory agency, such as the National Association of
Securities Dealers, Inc. ("NASD"). A Dealer to whom substantially the entire
sales charge of Class A shares is reallowed may be deemed to be an "underwriter"
under federal securities laws. The Distributor also may pay banks and other
financial services firms that facilitate transactions in shares of the funds for
their clients a transaction fee up to the level of the payments made allowable
to dealers for the sale of such shares as described above. Banks and financial
institutions may be required to register as dealers pursuant to state law.
The Investment Manager or Distributor also may pay a marketing allowance to
dealers who meet certain eligibility criteria. This allowance is paid with
reference to new sales of Fund shares (except shares of Cash Fund) in a calendar
year and may be discontinued at any time. To be eligible for this allowance in
any given year, the dealer must sell a minimum of $2,000,000 of Class A, Class B
and Class C shares during that year. The applicable marketing allowance factors
are set forth below.
--------------------------------------------------------------------------------
APPLICABLE MARKETING
AGGREGATE NEW SALES ALLOWANCE FACTOR*
--------------------------------------------------------------------------------
Less than $2 million ......................................... .00%
$2 million but less than $5 million .......................... .15%
$5 million but less than $10 million ......................... .25%
$10 million but less than $15 million ........................ .35%
$15 million but less than $20 million ........................ .50%
$20 million or more .......................................... .75%
--------------------------------------------------------------------------------
*The maximum marketing allowance factor applicable per this schedule will be
applied to all new sales in the calendar year to determine the marketing
allowance payable for such year.
--------------------------------------------------------------------------------
For the calendar year ended December 31, 1999, the following dealers received a
marketing allowance:
--------------------------------------------------------------------------------
DEALER AMOUNT
--------------------------------------------------------------------------------
Legend Equities Corp............................................. $167,065
Investment Advisors & Consultants, Inc........................... $39,609
VSR Financial Services, Inc...................................... $15,654
OFG Financial Services, Inc...................................... $20,352
KMS Financial Services........................................... $3,998
--------------------------------------------------------------------------------
CASH FUND-- Cash Fund offers a single class of shares at net asset value next
determined after an order is accepted. There is no sales charge or load. The
minimum initial investment in Cash Fund is $100 for each account. Subsequent
investments may be made in any amount of $20 or more. Cash Fund purchases may be
made in any of the following ways:
1. BY MAIL.
(a) A check or negotiable bank draft should be sent to:
Security Cash Fund
P.O. Box 2548
Topeka, Kansas 66601-2548
(b) Make check or draft payable to "Security Cash Fund."
(c) For initial investment include a completed investment application found
at the back of the Prospectus.
2. BY WIRE.
(a) Call the Fund to advise of the investment. The Fund will supply an
account number at the time of the initial investment and provide
instructions for having your bank wire federal funds.
(b) For an initial investment, you must also send a completed investment
application to the Fund.
3. THROUGH BROKER/DEALERS. Investors may, if they wish, invest in Cash Fund by
purchasing shares through registered broker/dealers. Such broker/dealers who
process orders on behalf of their customers may charge a fee for their
services. Investments made directly without the assistance of a
broker/dealer are without charge.
Since Cash Fund invests in money market securities which require immediate
payment in federal funds, monies received from the sales of its shares must be
monies held by a commercial bank and be on deposit at one of the Federal Reserve
Banks. A record date for each stockholder's investment is established each
business day and used to distribute the following day's dividend. If federal
funds are received prior to 2:00 p.m. (Central time) the investment will be made
on that day and the investor will receive the following day's dividend. Federal
funds received after 2:00 p.m. on any business day will not be invested until
the following business day. Cash Fund will not be responsible for any delays in
the wire transfer system. All checks are accepted subject to collection at full
face value in United States funds and must be drawn in United States dollars on
a United States bank.
PURCHASES AT NET ASSET VALUE
Class A shares of Diversified Income, High Yield and Municipal Bond Funds may be
purchased at net asset value by (1) directors, officers and employees of the
Funds, the Funds' Investment Manager or Distributor; directors, officers and
employees of Security Benefit Life Insurance Company and its subsidiaries;
agents licensed with Security Benefit Life Insurance Company; spouses or minor
children of any such agents; as well as the following relatives of any such
directors, officers and employees (and their spouses): spouses, grandparents,
parents, children, grandchildren, siblings, nieces and nephews; (2) any trust,
pension, profit sharing or other benefit plan established by any of the
foregoing corporations for persons described above; (3) retirement plans where
third party administrators of such plans have entered into certain arrangements
with the Distributor or its affiliates provided that no commission is paid to
dealers; and (4) officers, directors, partners or registered representatives
(and their spouses and minor children) of broker/dealers who have a selling
agreement with the Distributor. Such sales are made upon the written assurance
of the purchaser that the purchase is made for investment purposes and that the
securities will not be transferred or resold except through redemption or
repurchase by or on behalf of the Funds.
Life agents and associated personnel of broker/dealers must obtain a special
application from their employer or from the Distributor, in order to qualify for
such purchases.
Class A shares of Diversified Income, High Yield and Municipal Bond Funds may be
purchased at net asset value when the purchase is made on the recommendation of
(i) a registered investment adviser, trustee or financial intermediary who has
authority to make investment decisions on behalf of the investor; or (ii) a
certified financial planner or registered broker-dealer who either charges
periodic fees to its customers for financial planning, investment advisory or
asset management services, or provides such services in connection with the
establishment of an investment account for which a comprehensive "wrap fee" is
imposed. Class A shares of Diversified Income, High Yield and Municipal Bond
Funds may also be purchased at net asset value when the purchase is made by
retirement plans that (i) buy shares of the Security Funds worth $500,000 or
more; (ii) have 100 or more eligible employees at the time of purchase; (iii)
certify it expects to have annual plan purchases of shares of Security Funds of
$200,000 or more; (iv) are provided administrative services by certain
third-party administrators that have entered into a special service arrangement
with the Security Funds relating to such plans or (v) have at the time of
purchase, aggregate assets of at least $1,000,000. Purchases made pursuant to
this provision may be subject to a deferred sales charge of up to 1% in the
event of a redemption within one year of the purchase.
The Distributor must be notified when a purchase is made that qualifies under
any of the above provisions.
ACCUMULATION PLAN
Investors in Diversified Income, High Yield or Municipal Bond Fund may purchase
shares on a periodic basis under an Accumulation Plan which provides for an
initial investment of $100 minimum, and subsequent investments of $20 minimum at
any time. An Accumulation Plan is a voluntary program, involving no obligation
to make periodic investments, and is terminable at will. Payments are made by
sending a check to the Distributor who (acting as an agent for the dealer) will
purchase whole and fractional shares of the Funds as of the close of business on
the day such payment is received. A confirmation and statement of account will
be sent to the investor following each investment. Certificates for whole shares
will be issued upon request. No certificates will be issued for fractional
shares which may be withdrawn only by redemption for cash.
Investors may choose to use "Secur-O-Matic" (automatic bank draft) to make their
Fund purchases. There is no additional charge for using Secur-O-Matic. An
application may be obtained from the Funds.
SYSTEMATIC WITHDRAWAL PROGRAM
A Systematic Withdrawal Program may be established by stockholders who wish to
receive regular monthly, quarterly, semiannual or annual payments of $25 or
more. A Program may also be based upon the liquidation of a fixed or variable
number of shares provided that the minimum amount is withdrawn. However, the
Funds do not recommend this (or any other amount) as an appropriate withdrawal.
Shares with a current offering price of $5,000 or more must be deposited with
the Investment Manager acting as agent for the stockholder under the Program.
There is no service charge on the Program as the Investment Manager pays the
costs involved.
Sufficient shares will be liquidated at net asset value to meet the specified
withdrawals. Liquidation of shares may deplete or possibly use up the
investment, particularly in the event of a market decline. Payments cannot be
considered as actual yield or income since part of such payments is a return of
capital and may constitute a taxable event to the stockholder. The maintenance
of a Withdrawal Program concurrently with purchases of additional shares of
Diversified Income, High Yield or Municipal Bond Fund would be disadvantageous
because of the sales commission payable in respect to such purchases. During the
withdrawal period, no payments will be accepted under an Accumulation Plan.
Income dividends and capital gains distributions are automatically reinvested at
net asset value. If an investor has an Accumulation Plan in effect, it must be
terminated before a Systematic Withdrawal Program may be initiated.
The stockholder receives confirmation of each transaction showing the source of
the payment and the share balance remaining in the Program. A Program may be
terminated on written notice by the stockholder or the Funds, and it will
terminate automatically if all shares are liquidated or withdrawn from the
account.
A stockholder may establish a Systematic Withdrawal Program with respect to
Class B or Class C shares without the imposition of any applicable contingent
deferred sales charge, provided that such withdrawals do not in any 12-month
period, beginning on the date the Program is established, exceed 10% of the
value of the account on that date ("Free Systematic Withdrawals"). Free
Systematic Withdrawals are not available if a Program established with respect
to Class B or Class C shares provides for withdrawals in excess of 10% of the
value of the account in any Program year and, as a result, all withdrawals under
such a Program would be subject to any applicable contingent deferred sales
charge. Free Systematic Withdrawals will be made first by redeeming those shares
that are not subject to the contingent deferred sales charge and then by
redeeming shares held the longest. The contingent deferred sales charge
applicable to a redemption of Class B and Class C shares requested while Free
Systematic Withdrawals are being made will be calculated as described under
"Calculation and Waiver of Contingent Deferred Sales Charges," page 32. A
Systematic Withdrawal form may be obtained from the Funds.
INVESTMENT MANAGEMENT
Security Management Company, LLC (the "Investment Manager"), 700 SW Harrison
Street, Topeka, Kansas, has served as investment adviser to Income Fund,
Municipal Bond Fund and Cash Fund, respectively, since September 14, 1970,
October 7, 1983 and June 23, 1980. The current Investment Advisory Contract for
each of Income Fund, Municipal Bond Fund and Cash Fund is dated November 1,
1999. The Investment Manager also acts as investment adviser to Security Equity
Fund, Security Growth and Income Fund, Security Ultra Fund and SBL Fund. The
Investment Manager is a limited liability company controlled by its members,
Security Benefit Life Insurance Company and Security Benefit Group, Inc.
("SBG"). SBG is an insurance and financial services holding company wholly-owned
by Security Benefit Life Insurance Company, 700 SW Harrison Street, Topeka,
Kansas 66636-0001. Security Benefit Life, a stock life insurance company
incorporated under the laws of Kansas, is controlled by Security Benefit Corp.
("SBC"). SBC is wholly-owned by Security Benefit Mutual Holding Company, which
is in turn controlled by Security Benefit Life policyholders. Security Benefit
Life together with its subsidiaries, has approximately $9.9 billion of assets
under management.
Pursuant to the Investment Advisory Contracts, the Investment Manager furnishes
investment advisory, statistical and research services to the Funds, supervises
and arranges for the purchase and sale of securities on behalf of the Funds,
provides for the maintenance and compilation of records pertaining to the
investment advisory functions, and also makes certain guarantees with respect to
the Funds' annual expenses. The Investment Manager guarantees that the aggregate
annual expenses of the respective Funds (including for any fiscal year, the
management fee, but excluding interest, taxes, brokerage commissions,
extraordinary expenses and Class B and Class C distribution fees) shall not for
Diversified Income and High Yield Funds exceed the level of expenses which the
Fund is permitted to bear under the most restrictive expense limitation imposed
by any state in which shares of the Fund are then qualified for sale and shall
not for Cash Fund exceed 1% of the Fund's average net assets for the year. (The
Investment Manager is not aware of any state that currently imposes limits on
the level of mutual fund expenses.) For Municipal Bond Fund, the Investment
Manager guarantees that the aggregate annual expenses of the Fund (including for
any fiscal year, the management fee, but excluding interest, taxes,
extraordinary expenses, and Class A and Class B distribution fees) shall not
exceed 1% of the Fund's average net assets for the year. The Investment Manager
will contribute such funds or waive such portion of its management fee as may be
necessary to insure that the aggregate expenses of the Funds will not exceed the
guaranteed maximum.
The Investment Manager has engaged Salomon Brothers Asset Management Inc
("Salomon Brothers"), 7 World Trade Center, New York, NY 10048, to provide
investment advisory services to the Municipal Bond Fund pursuant to a
Sub-Advisory Agreement dated May 1, 1998. Pursuant to this agreement, Salomon
Brothers furnishes investment advisory, statistical and research facilities,
supervises and arranges for the purchase and sale of securities on behalf of
Municipal Bond Fund and provides for the compilation and maintenance of records
pertaining to such investment advisory services, subject to the control and
supervision of the Fund's Board of Directors and the Investment Manager. For
such services, the Investment Manager pays Salomon Brothers an amount equal to
.22% of the average net assets of Municipal Bond Fund, computed on a daily basis
and payable monthly. The Sub-Advisory Agreement may be terminated without
penalty at any time by either party on 60 days' written notice and is
automatically terminated in the event of its assignment or in the event that the
Investment Advisory Contract between the Investment Manager and the Fund is
terminated, assigned or not renewed.
Salomon Brothers is a wholly-owned subsidiary of Salomon Brothers Holding
Company, Inc., which is wholly-owned by Salomon Smith Barney Holdings, Inc.,
which is, in turn, wholly-owned by Citigroup, Inc. Salomon Brothers was
incorporated in 1987 and together with Salomon Brothers affiliates in London,
Frankfurt, Tokyo and Hong Kong, provides a broad range of investment advisory
services to various individuals and institutional clients located throughout the
world and serves as investment adviser to various investment companies.
Currently Salomon Brothers and its affiliates manage approximately $29 billion
in assets.
For services provided to the Funds, the Investment Manager is entitled to
receive compensation on an annual basis equal to .35% of the average daily
closing value of the Diversified Income Fund's net assets, .50% of the average
daily closing value of the Municipal Bond and Cash Fund's net assets and .60% of
the average daily closing value of the High Yield Fund's net assets, each
computed on a daily basis and payable monthly. For the years ended December 31,
1999, 1998 and 1997, the Investment Manager agreed to limit the total expenses
(including its compensation, but excluding interest, taxes, extraordinary
expenses and Class B distribution fees) to 1.1% of the average daily net assets
of the Class A shares and 1.85% of the average daily net assets of the Class B
shares of the Diversified Income Fund. For the years ended December 31, 1999 and
1998, the Investment Manager also agreed to limit the total expenses (including
its compensation, but excluding interest, taxes, extraordinary expenses and
Class B distribution fees) of High Yield Fund to 1.0% of the average daily net
assets of Class A shares and 2.75% of Class B shares of the Fund. For the years
ended December 31, 1999 and 1998, expenses incurred by Municipal Bond Fund
exceeded 1% of its average net assets. In addition, the Investment Manager
waived the investment advisory fees of Diversified Income and High Yield Funds
for the fiscal years ended December 31, 1999, 1998 and 1997.
Each Fund will pay all of its expenses not assumed by the Investment Manager or
the Distributor including organization expenses; directors' fees; fees and
expenses of custodian; taxes and governmental fees; interest charges; membership
dues; brokerage commissions; reports; proxy statements; costs of stockholder and
other meetings; any distribution fees; and legal, auditing and accounting
expenses. Each Fund will also pay for the preparation and distribution of the
Prospectus to its stockholders and all expenses in connection with its
registration under federal and state securities laws. Each Fund will pay
nonrecurring expenses as may arise, including litigation affecting it.
The Investment Advisory Contracts between Security Management Company, LLC and
Income Fund, Municipal Bond Fund and Cash Fund, each dated November 1, 1999,
will expire on November 1, 2001. The contracts are renewable annually by the
Funds' Board of Directors or by a vote of a majority of a Fund's outstanding
securities and, in either event, by a majority of the board who are not parties
to the contract or interested persons of any such party. The contracts provide
that they may be terminated without penalty at any time by either party on 60
days' notice and are automatically terminated in the event of assignment.
Pursuant to Administrative Services Agreements with the Funds dated April 1,
1987, the Investment Manager also acts as the administrative agent for the Funds
and as such performs administrative functions and the bookkeeping, accounting
and pricing functions for the Funds. For these services the Investment Manager
receives, on an annual basis, a fee of .09% of the average net assets of
Diversified Income, High Yield and Municipal Bond Funds and .045% of the average
net assets of Cash Fund, calculated daily and payable monthly.
Under the Administrative Services Agreements discussed above, the Investment
Manager also acts as the transfer agent for the Funds. As such, the Investment
Manager performs all shareholder servicing functions, including transferring
record ownership, processing purchase and redemption transactions, answering
inquiries, mailing stockholder communications and acting as the dividend
disbursing agent. For these services, the Investment Manager receives an annual
maintenance fee of $8.00 per account, a fee of $1.00 per shareholder
transaction, and a fee of $1.00 ($.50 for Cash Fund) per dividend transaction.
During the fiscal years ended December 31, 1999, 1998 and 1997, the Funds paid
the following amounts to the Investment Manager for its services.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INVESTMENT ADMINISTRATIVE TRANSFER
ADVISORY REIMBURSEMENT ADVISORY FEES SERVICE FEES AGENCY SERVICE
FEES PAID TO OF EXPENSES WAIVED BY PAID TO FEES PAID TO EXPENSE RATIO
INVESTMENT BY INVESTMENT INVESTMENT INVESTMENT INVESTMENT -----------------
FUND YEAR MANAGER MANAGER MANAGER MANAGER MANAGER CLASS A CLASS B
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 95,618 827 95,618 17,211 74,590 .87% 1.85%
Diversified Income Fund 1998 60,492 14,770 60,492 10,889 44,220 .93% 1.85%
1997 42,687 0 42,687 7,684 18,944 .60% 1.68%
------------------------------------------------------------------------------------------------------------------------------------
1999 65,106 0 65,106 9,766 14,182 .72% 1.53%
High Yield Fund 1998 55,715 0 55,715 8,357 15,743 .76% 1.53%
1997 41,748 0 41,748 6,557 8,425 .87% 1.80%
------------------------------------------------------------------------------------------------------------------------------------
1999 99,435 30,293 0 17,898 11,214 1.01% 1.76%
Municipal Bond Fund 1998 113,719 2,927 0 20,469 13,726 .82% 2.01%
1997 115,812 0 0 20,846 15,105 .82% 2.00%
------------------------------------------------------------------------------------------------------------------------------------
1999 334,020 0 0 30,062 121,225 .86% ---
Cash Fund 1998 326,960 0 0 29,803 125,374 .89% ---
1997 238,616 0 0 21,990 119,258 .90% ---
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following persons are affiliated with the Funds and also with the Investment
Manager in these capacities:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
NAME POSITIONS WITH THE FUNDS POSITIONS WITH SECURITY MANAGEMENT COMPANY, LLC
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
James R. Schmank President and Director President and Managing Member Representative
John D. Cleland Chairman of the Board and Director Senior Vice President and Managing Member Representative
Amy J. Lee Secretary Secretary
Brenda M. Harwood Treasurer Assistant Vice President and Treasurer
Steven M. Bowser Vice President (Income Fund and SBL Fund only) Vice President and Portfolio Manager
Thomas A. Swank Vice President (Income Fund and SBL Fund only) Senior Vice President and Portfolio Manager
Christopher D. Swickard Assistant Secretary Assistant Secretary
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PORTFOLIO MANAGEMENT -- The Diversified Income, High Yield, Municipal Bond and
Cash Funds are managed by the Investment Manager's Fixed Income Team with
portfolio managers being responsible for the day-to-day management of each
particular Fund. Steve Bowser, Vice President and Portfolio Manager of the
Investment Manager, has had day-to-day responsibility for managing Diversified
Income Fund since 1995. Chris Phalen, Research Analyst of the Investment
Manager, has served as co-manager of Diversified Income Fund since May 2000.
David G. Toussaint, Portfolio Manager of the Investment Manager, has had
day-to-day responsibility for managing High Yield Fund since April 2000. Robert
Amodeo, Portfolio Manager of Salomon Brothers, has had day-to-day responsibility
for managing Municipal Bond Fund since September 1998.
Mr. Bowser joined the Investment Manager in 1992. Prior to joining the
Investment Manager, he was Assistant Vice President and Portfolio Manager with
the Federal Home Loan Bank of Topeka from 1989 to 1992. He was employed at the
Federal Reserve Bank of Kansas City in 1988 and began his career with the Farm
Credit System from 1982 to 1987, serving as a Senior Financial Analyst and
Assistant Controller. He graduated with a Bachelor of Science degree from Kansas
State University in 1982.
Mr. Phalen joined the Investment Manager in 1997. Prior to 1997, he was with
Sprint PCS as a pricing analyst. Prior to joining Sprint PCS in 1997, Mr. Phalen
was employed by Security Benefit Group, Inc. Mr. Phalen graduated from the
University of Kansas with a bachelor of business administration and accounting
degree.
Mr. Toussaint joined the Investment Manager in 2000. Prior to joining the
Investment Manager, he was with Allstate Insurance Company as an investment
analyst and in various managerial positions in their investment operations
group. Mr. Toussaint has nine years of investment experience and is a Chartered
Financial Analyst. In addition, Mr. Toussaint holds a CPA certificate. Mr.
Toussaint earned a bachelor of arts degree in Economics from the University of
Illinois, a master of science degree in Accountancy from DePaul University and
an M.B.A. from the University of Chicago.
Mr. Amodeo joined Salomon Brothers Asset Management in 1992. Prior to that, Mr.
Amodeo was a member of Salomon Brothers, Inc. Partnership Investment Group where
he was responsible for analyzing and managing various partnership investments.
Mr. Amodeo pioneered adaptation and the use of the Yield Book for municipal bond
portfolio management, analysis, performance attribution and optimization. He
received a B.S. in Business Management from Long Island University and he is a
Chartered Financial Analyst.
CODE OF ETHICS -- The Funds, the Investment Manager and the Distributor each has
adopted a written code of ethics (the "Code of Ethics") which governs the
personal securities transactions of "access persons" of the Funds. Access
persons may invest in securities, including securities that may be purchased or
held by the Funds; provided that they obtain prior clearance before engaging in
securities transactions, subject to certain exceptions, including an exception
for small transactions in large capitalization companies. Access persons include
officers and directors of the Funds and Investment Manager and employees that
participate in, or obtain information regarding, the purchase or sale of
securities by the Funds or whose job relates to the making of any
recommendations with respect to such purchases or sales. All access persons must
report their personal securities transactions within ten days of the end of each
calendar quarter. Access persons will not be permitted to effect transactions in
a security if it: (a) is being considered for purchase or sale by the Funds; (b)
is being purchased or sold by the Funds; or (c) is being offered in an initial
public offering. Portfolio managers are also prohibited from purchasing or
selling a security within seven calendar days before or after a Fund that he or
she manages trades in that security. Any material violation of the Code of
Ethics is reported to the Board of the Funds. The Board also reviews the
administration of the Code of Ethics on an annual basis. In addition, each
Sub-Adviser has adopted its own code of ethics to which the personal securities
transactions of its portfolio managers and other access persons are subject. The
Code of Ethics is on public file with the Securities and Exchange Commission and
is available from the Commission.
DISTRIBUTOR
Security Distributors, Inc. (the "Distributor"), a Kansas corporation and
wholly-owned subsidiary of Security Benefit Group, Inc., serves as the principal
underwriter for shares of Diversified Income, High Yield and Municipal Bond
Funds pursuant to Distribution Agreements dated March 27, 1984, as amended, for
Diversified Income and High Yield Funds and October 7, 1983, for Municipal Bond
Fund.
The Distributor receives a maximum commission on Class A Shares of 4.75% and
allows a maximum discount of 4.0% from the offering price to authorized dealers
on Fund shares sold. The discount is alike for all dealers, but the Distributor
may increase it for specific periods at its discretion. Salespersons employed by
dealers may also be licensed to sell insurance with Security Benefit Life.
For the fiscal years ended December 31, 1999 and December 31, 1998, the
Distributor (i) received gross underwriting commissions on Class A shares, (ii)
retained net underwriting commissions on Class A shares, and (iii) received
contingent deferred sales charges on redemptions of Class B shares in the
amounts set forth in the table below.
--------------------------------------------------------------------------------
GROSS UNDERWRITING NET UNDERWRITING COMPENSATION
COMMISSIONS COMMISSIONS ON REDEMPTION
--------------------------------------------------------------------------------
1998 1999 1998 1999 1998 1999
Diversified Income Fund $34,498 $10,939 $3,676 $1,643 $2,208 $10,847
High Yield Fund 12,912 10,997 578 1,889 127 4,770
Municipal Bond Fund 18,315 10,552 3,709 2,115 5,887 2,024
--------------------------------------------------------------------------------
The Distributor received gross underwriting commissions on sales of Class A
shares and contingent deferred sales charges on redemptions for Class B shares
of $96,838 for Income Fund and $12,576 for Municipal Bond Fund and retained net
underwriting commissions of $7,191 for Income Fund and $2,115 for Municipal Bond
Fund for the fiscal year ended December 31, 1999.
The Distributor, on behalf of the Funds, may act as a broker in the purchase and
sale of securities not effected on a securities exchange, provided that any such
transactions and any commissions shall comply with requirements of the
Investment Company Act of 1940 and all rules and regulations of the Securities
and Exchange Commission. The Distributor has not acted as a broker.
Each Fund's Distribution Agreement is renewable annually either by the Funds'
Board of Directors or by a vote of a majority of the Fund's outstanding
securities, and, in either event, by a majority of the board who are not parties
to the agreement or interested persons of any such party. The agreements may be
terminated by either party upon 60 days' written notice.
ALLOCATION OF PORTFOLIO BROKERAGE
Transactions in portfolio securities shall be effected in such manner as deemed
to be in the best interest of each respective Fund. In reaching a judgment
relative to the qualifications of a broker or dealer to obtain the best
execution of a particular transaction, all relevant factors and circumstances
will be taken into account by the Investment Manager, including consideration of
the overall reasonableness of commissions paid to a broker, the firm's general
execution and operational capabilities, and its reliability and financial
condition. The Funds do not anticipate that they will incur a significant amount
of brokerage commissions because fixed income securities are generally traded on
a "net" basis--that is, in principal amount without the addition or deduction of
a stated brokerage commission, although the net price usually includes a profit
to the dealer. The Funds will deal directly with the selling or purchasing
principal without incurring charges for the services of a broker on its behalf
unless it is determined that a better price or execution may be obtained by
utilizing the services of a broker. The Funds also may purchase portfolio
securities in underwritings where the price includes a fixed underwriter's
concession or discount. Money market instruments may be purchased directly from
the issuer at no commission or discount.
Portfolio transactions that require a broker may be directed to brokers who
furnish investment information or research services to the Investment Manager.
Such investment information and research services include advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities and the availability of securities and purchasers or sellers of
securities, and furnishing analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and performance of
accounts. Such investment information and research services may be furnished by
brokers in many ways, including: (1) on-line data base systems, the equipment
for which is provided by the broker, that enable registrant to have real-time
access to market information, including quotations; (2) economic research
services, such as publications, chart services and advice from economists
concerning macroeconomic information; and (3) analytical investment information
concerning particular corporations. If a transaction is directed to a broker
supplying such information or services, the commission paid for such transaction
may be in excess of the commission another broker would have charged for
effecting that transaction, provided that the Investment Manager shall have
determined in good faith that the commission is reasonable in relation to the
value of the investment information or the research services provided, viewed in
terms of either that particular transaction or the overall responsibilities of
the Investment Manager with respect to all accounts as to which it exercises
investment discretion. The Investment Manager may use all, none, or some of such
information and services in providing investment advisory services to each of
the mutual funds under its management, including the Funds.
In addition, brokerage transactions may be placed with broker/dealers who sell
shares of the Funds managed by the Investment Manager who may or may not also
provide investment information and research services. The Investment Manager
may, consistent with the NASD Conduct Rules, consider sales of Fund shares in
the selection of a broker/dealer.
Securities held by the Funds may also be held by other investment advisory
clients of the Investment Manager, including other investment companies. In
addition, the Investment Manager's parent company, Security Benefit Life
Insurance Company ("SBL"), may also hold some of the same securities as the
Funds. When selecting securities for purchase or sale for a Fund, the Investment
Manager may at the same time be purchasing or selling the same securities for
one or more of such other accounts. Subject to the Investment Manager's
obligation to seek best execution, such purchases or sales may be executed
simultaneously or "bunched." It is the policy of the Investment Manager not to
favor one account over the other. Any purchase or sale orders executed
simultaneously (which may also include orders from SBL) are allocated at the
average price and as nearly as practicable on a pro rata basis (transaction
costs will also generally be shared on a pro rata basis) in proportion to the
amounts desired to be purchased or sold by each account. In those instances
where it is not practical to allocate purchase or sale orders on a pro rata
basis, then the allocation will be made on a rotating or other equitable basis.
While it is conceivable that in certain instances this procedure could adversely
affect the price or number of shares involved in the Fund's transaction, it is
believed that the procedure generally contributes to better overall execution of
the Funds' portfolio transactions. The Board of Directors of the Funds has
adopted guidelines governing this procedure and will monitor the procedure to
determine that the guidelines are being followed and that the procedure
continues to be in the best interest of the Fund and its stockholders. With
respect to the allocation of initial public offerings ("IPOs"), the Investment
Manager may determine not to purchase such offerings for certain of its clients
(including investment company clients) due to the limited number of shares
typically available to the Investment Manager in an IPO. No brokerage
commissions were paid by the Funds for the years ended December 31, 1999, 1998,
and 1997.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close of
regular trading hours on the New York Stock Exchange (normally 3:00 p.m. Central
time) on each day that the Exchange is open for trading, which is Monday through
Friday except for the following dates when the Exchange is closed in observance
of Federal holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The determination is made by dividing the total value of the
portfolio securities of each Fund, plus any cash or other assets (including
dividends accrued but not collected), less all liabilities, by the number of
shares outstanding of the Fund.
Securities listed or traded on a national securities exchange are valued at the
last sale price. If there are no sales on a particular day, then the securities
are valued at the last bid price. All other securities, held by Diversified
Income and High Yield Funds, for which market quotations are readily available,
are valued on the basis of the last current bid price. If there is no bid price,
or if the bid price is deemed to be unsatisfactory by the Board of Directors,
then the securities shall be valued in good faith by such method as the Board of
Directors determines will reflect fair market value. Valuations of the Funds'
securities are supplied by a pricing service approved by the Board of Directors.
Valuations furnished by the pricing service with respect to Municipal Bond
Fund's municipal securities are based upon appraisals from recognized municipal
securities dealers derived from information concerning market transactions and
quotations. Securities for which market quotations are readily available are
valued at the last reported sale price, or, if no sales are reported on that
day, at the mean between the latest available bid and asked prices. Securities
for which market quotations are not readily available (which are expected to
constitute the majority of Municipal Bond Fund's portfolio securities) are
valued at the best available current bid price by the pricing service,
considering such factors as yields or prices of municipal bonds of comparable
quality, type of issue, coupon, maturity and rating, indications as to value
from dealers, and general market conditions. The Fund's officers, under the
general supervision of the Board of Directors, will regularly review procedures
used by, and valuations provided by, the pricing service. Municipal Bond Fund's
taxable short-term securities for which market quotations are readily available
will be valued at market value, which is the last reported sale price or, if no
sales are reported on that day, at the mean between the latest available bid and
asked prices except that securities having 60 days or less remaining to maturity
may be valued at their amortized cost as discussed below.
Cash Fund's securities are valued by the amortized cost valuation technique
which does not take into consideration unrealized gains or losses. The amortized
cost valuation technique involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price Cash Fund would receive if it sold the
instrument.
During periods of declining interest rates, the daily yield on shares of Cash
Fund computed as described above may tend to be higher than a like computation
made by a fund with identical investments utilizing a method of valuation based
upon market prices and estimates of market prices for all of its portfolio
instruments. Thus, if the use of amortized cost by Cash Fund resulted in lower
aggregate portfolio value on a particular day, a prospective investor in the
Fund would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing solely market values and existing investors in
Cash Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
The use of amortized cost and the maintenance of Cash Fund's per share net asset
value at $1.00 is based on its election to operate under the provisions of Rule
2a-7 under the Investment Company Act of 1940. As a condition of operating under
that rule, the Fund must maintain a dollar-weighted average portfolio maturity
of 90 days or less, purchase only instruments having remaining maturities of
thirteen months or less, and invest only in securities which are determined by
the Board of Directors to present minimal credit risks and which are of high
quality as determined by any major rating service, or in the case of any
instrument not so rated, considered by the Board of Directors to be of
comparable quality.
The Board of Directors has established procedures designed to maintain Cash
Fund's price per share, as computed for the purpose of sales and redemptions, at
$1.00. These procedures include a review of the Fund's holdings by the Board of
Directors at such intervals as they deem appropriate to determine whether the
Fund's net asset value calculated using available market quotations deviates
from $1.00 per share based on amortized cost. If any deviation exceeds 1/2 of
1%, the Board of Directors will promptly consider what action, if any, will be
initiated. In the event the Board of Directors determines that a deviation
exists which may result in material dilution or other unfair results to
investors or existing shareholders, they have agreed to take such corrective
action as they regard as necessary and appropriate, including the sale of some
instruments in Cash Fund's portfolio prior to maturity to shorten average Fund
maturity or withholding dividends. Cash Fund will use its best efforts to
maintain a constant net asset value per share of $1.00. See "Security Cash
Fund," page 11, and "Dividends and Taxes," page 44. Since dividends from net
investment income will be accrued daily and paid monthly, the net asset value
per share of Cash Fund will ordinarily remain at $1.00, but the Fund's daily
dividends will vary in amount.
Diversified Income Fund, High Yield Fund and Municipal Bond Fund may use the
amortized cost valuation technique utilized by Cash Fund for securities with
maturities of 60 days or less. In addition, Diversified Income, High Yield and
Municipal Bond Funds may use a similar procedure for securities having 60 days
or less remaining to maturity with the value of the security on the 61st day
being used rather than the cost.
The Funds will accept orders from dealers on each business day up to 4:30 p.m.
(Central time).
HOW TO REDEEM SHARES
A stockholder may redeem shares at the net asset value next determined after
such shares are tendered for redemption. The amount received may be more or less
than the investor's cost, depending upon the market value of the portfolio
securities at the time of redemption.
Shares will be redeemed on request of the stockholder in proper order to the
Investment Manager, which serves as the Funds' transfer agent. A request is made
in proper order by submitting the following items to the Investment Manager: (1)
a written request for redemption signed by all registered owners exactly as the
account is registered, including fiduciary titles, if any, and specifying the
account number and the dollar amount or number of shares to be redeemed; (2) a
guarantee of all signatures on the written request or on the share certificate
or accompanying stock power; (3) any share certificates issued for any of the
shares to be redeemed; and (4) any additional documents which may be required by
the Investment Manager for redemption by corporations or other organizations,
executors, administrators, trustees, custodians or the like. Transfers of share
ownership are subject to the same requirements. A signature guarantee is not
required for redemptions of $10,000 or less, requested by and payable to all
stockholders of record for an account, to be sent to the address of record. The
signature guarantee must be provided by an eligible guarantor institution, such
as a bank, broker, credit union, national securities exchange or savings
association. The Investment Manager reserves the right to reject any signature
guarantee pursuant to its written procedures which may be revised in the future.
To avoid delay in redemption or transfer, stockholders having questions should
contact the Investment Manager.
The amount due on redemption, will be the net asset value of the shares next
computed after the redemption request in proper order is received by the
Investment Manager less any applicable deferred sales charge. In addition,
stockholders of Cash Fund will receive any undistributed dividends, including
any dividend declared on the day of the redemption. Payment of the redemption
price will be made by check (or by wire at the sole discretion of the Investment
Manager if wire transfer is requested, including name and address of the bank
and the stockholder's account number to which payment is to be wired) within
seven days after receipt of the redemption request in proper order. The check
will be mailed to the stockholder's registered address (or as otherwise
directed). Remittance by wire (to a commercial bank account in the same name(s)
as the shares are registered) or by express mail, if requested, will be at a
charge of $15, which will be deducted from the redemption proceeds.
Cash Fund offers redemption by check. If blank checks are requested on the Check
Writing Request form, the Fund will make a supply available. Checks for the Cash
Fund may be drawn payable to the order of any payee (not to cash) in any amount
of $100 or more. Checks may be cashed or deposited like any other check drawn on
a bank. When a check is presented to the Fund for payment, it will redeem
sufficient full and fractional shares to cover the check. Such shares will be
redeemed at the price next calculated following receipt of any check which does
not exceed the value of the account. The price of Cash Fund shares may fluctuate
from day-to-day and the price at the time of redemption, by check or otherwise,
may be less than the amount invested. Any check presented for payment which is
more than the value of the account will be returned without payment, marked
"Insufficient Funds." Each new stockholder will initially receive twelve checks
free of charge and such additional checks as may be required. Since the amount
available for withdrawal fluctuates daily, it is not practical for a stockholder
to attempt to withdraw the entire investment by check. The Fund reserves the
right to terminate this service at any time with respect to existing as well as
future stockholders. Redemption by check is not available if any shares are held
in certificate form or if shares being redeemed have not been on the Fund's
books for at least 15 days.
When investing in the Funds, stockholders are required to furnish their tax
identification number and to state whether or not they are subject to
withholding for prior underreporting, certified under penalties of perjury as
prescribed by the Internal Revenue Code. To the extent permitted by law, the
redemption proceeds of stockholders who fail to furnish this information will be
reduced by $50 to reimburse for the IRS penalty imposed for failure to report
the tax identification number on information reports.
Payment in cash of the amount due on redemption, less any applicable deferred
sales charge, for shares redeemed will be made within seven days after tender,
except that the Funds may suspend the right of redemption during any period when
trading on the New York Stock Exchange is restricted or such Exchange is closed
for other than weekends or holidays, or any emergency is deemed to exist by the
Securities and Exchange Commission. When a redemption request is received, the
redemption proceeds are deposited into a redemption account established by the
Distributor and the Distributor sends a check in the amount of redemption
proceeds to the stockholder. The Distributor earns interest on the amounts
maintained in the redemption account. Conversely, the Distributor may cause
payments to be made to the Funds in the case of orders for purchase of Fund
shares before it actually receives federal funds.
In addition to the foregoing redemption procedure, the Funds repurchase shares
from broker/dealers at the price determined as of the close of business on the
day such offer is confirmed. Dealers may charge a commission on the repurchase
of shares.
The repurchase or redemption of shares held in a tax-qualified retirement plan
must be effected through the trustee of the plan and may result in adverse tax
consequences. (See "Retirement Plans," page 50.)
At various times the Funds may be requested to redeem shares for which they have
not yet received good payment. Accordingly, the Funds may delay the mailing of a
redemption check until such time as they have assured themselves that good
payment (E.G., cash or certified check on a U.S. bank) has been collected for
the purchase of such shares, which may take up to 15 days from the purchase
date.
Municipal Bond Fund's Articles of Incorporation provide that, in order to
minimize expenses, the Fund may, pursuant to a resolution of the Board of
Directors, adopt a procedure whereby it would redeem stockholder accounts in
which there are fewer than 50 shares (or such lesser amount as the board
determines) after having given the stockholders at least 60 days' written notice
and an opportunity to increase the account to at least 50 shares. This procedure
can be implemented only after six months' prior notice to all stockholders that
the procedure will be put into effect. The Board of Directors has no present
plan to implement an involuntary redemption procedure.
TELEPHONE REDEMPTIONS -- Stockholders of the Funds may redeem uncertificated
shares in amounts up to $10,000 by telephone request, provided that the
stockholder has completed the Telephone Redemption section of the application or
a Telephone Redemption form which may be obtained from the Investment Manager.
The proceeds of a telephone redemption will be sent to the stockholder at his or
her address as set forth in the application or in a subsequent written
authorization. Once authorization has been received by the Investment Manager, a
stockholder may redeem shares by calling the Funds at (800) 888-2461, extension
3127, on weekdays (except holidays) between the hours of 7:00 a.m. and 6:00 p.m.
Central time. Redemption requests received by telephone after the close of the
New York Stock Exchange (normally 3:00 p.m. Central time) will be treated as if
received on the next business day. Telephone redemptions are not accepted for
IRA and 403(b)(7) accounts. A stockholder who authorizes telephone redemptions
authorizes the Investment Manager to act upon the instructions of any person
identifying themselves as the owner of the account or the owner's broker. The
Investment Manager has established procedures to confirm that instructions
communicated by telephone are genuine and will be liable for any losses due to
fraudulent or unauthorized instructions if it fails to comply with its
procedures. The Investment Manager's procedures require that any person
requesting a redemption by telephone provide the account registration and
number, the owner's tax identification number, and the dollar amount or number
of shares to be redeemed, and such instructions must be received on a recorded
line. Neither the Fund, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any redemption
request provided that the Investment Manager complied with its procedures. Thus,
a stockholder who authorizes telephone redemptions may bear the risk of loss
from a fraudulent or unauthorized request. The telephone redemption privilege
may be changed or discontinued at any time by the Investment Manager or the
Funds.
During periods of severe market or economic conditions, telephone redemptions
may be difficult to implement and stockholders should make redemptions by mail
as described under "How to Redeem Shares," page 41.
HOW TO EXCHANGE SHARES
Pursuant to arrangements with the Distributor, stockholders of the Funds may
exchange their shares for shares of another of the Funds, or for shares of the
other mutual funds distributed by the Distributor, which currently include
Security Equity, Growth and Income, Global, Ultra, Total Return, Social
Awareness, International, Enhanced Index, Select 25, Large Cap Growth and
Technology Funds. Such transactions generally have the same tax consequences as
ordinary sales and purchases and are not tax-free exchanges.
Shares of the Diversified Income Fund, High Yield Fund and Municipal Bond Fund
may be exchanged for shares of the same class of another of the funds
distributed by the Distributor or for shares of Cash Fund, which offers a single
class of shares. Any applicable contingent deferred sales charge will be
calculated from the date of the initial purchase without regard to the period of
time during which shares were held in Cash Fund.
Because Cash Fund does not impose a sales charge in connection with sales of its
shares, any exchange of Cash Fund shares acquired through direct purchase or
reinvestment of dividends will be based upon the respective net asset values of
the shares involved next determined after the exchange is accepted, and a sales
charge will be imposed equal to the sales charge that would be applicable if the
stockholder were purchasing shares of the other Fund involved for cash. The
amount of such sales charge will be paid by Cash Fund on behalf of the
exchanging stockholder directly to the Distributor and the net asset value of
the shares being exchanged will be reduced by a like amount.
Stockholders making such exchanges must provide the Investment Manager with
sufficient information to permit verification of their prior ownership of shares
of one of the other Security Funds. Shares of Cash Fund begin earning dividends
on the day after the date an exchange into such shares is effected. Any such
exchange is subject to the minimum investment and eligibility requirements of
each Fund. No service fee is presently imposed on such an exchange.
Exchanges may be accomplished by submitting a written request to the Investment
Manager, 700 SW Harrison Street, Topeka, Kansas 66636-0001. Broker/dealers who
process exchange orders on behalf of their customers may charge a fee for their
services. Such fee would be in addition to any of the sales or other charges
referred to above but may be avoided by making exchange requests directly to the
Investment Manager. Due to the high cost of exchange activity and the
maintenance of accounts having a net value of less than $100, Cash Fund reserves
the right to totally convert the account if at any time an exchange request
results in an account being lowered below the $100 minimum.
An exchange of shares, as described above, may result in the realization of a
capital gain or loss for federal income tax purposes, depending on the cost or
other value of the shares exchanged. No representation is made as to whether
gain or loss would result from any particular exchange or as to the manner of
determining the amount of gain or loss. (See "Dividends and Taxes," page 44.)
Before effecting any exchange described herein, the investor may wish to seek
the advice of a financial or tax adviser.
Exchanges of shares of the Funds may be made only in jurisdictions where shares
of the fund being acquired may lawfully be sold. More complete information about
the other Security Funds, including charges and expenses, are contained in the
current prospectus describing each fund. Stockholders are advised to obtain and
review carefully, the applicable prospectus prior to effecting any exchange. A
copy of such prospectus will be given by the Distributor to any requesting
stockholder.
The exchange privilege may be changed or discontinued any time at the discretion
of the management of the Funds upon 60 days' notice to stockholders. It is
contemplated, however, that this privilege will be extended in the absence of
objection by regulatory authorities and provided that shares of the various
funds are available and may be lawfully sold in the jurisdiction in which the
stockholder resides.
EXCHANGE BY TELEPHONE -- To exchange shares by telephone, a stockholder must
have completed either the Telephone Exchange section of the application or a
Telephone Transfer Authorization form which may be obtained from the Investment
Manager. Authorization must be on file with the Investment Manager before
exchanges may be made by telephone. Once authorization has been received by the
Investment Manager, a stockholder may exchange shares by telephone by calling
the Funds at (800) 888-2461, extension 3127, on weekdays (except holidays)
between the hours of 7:00 a.m. and 6:00 p.m. Central time. Exchange requests
received by telephone after the close of the New York Stock Exchange (normally
3:00 p.m. Central time) will be treated as if received on the next business day.
Shares which are held in certificate form may not be exchanged by telephone. The
telephone exchange privilege is only permitted between accounts with identical
registration. The Investment Manager has established procedures to confirm that
instructions communicated by telephone are genuine and will be liable for any
losses due to fraudulent or unauthorized instructions, if it fails to comply
with its procedures. The Investment Manager's procedures require that any person
requesting an exchange by telephone provide the account registration and number,
the tax identification number, the dollar amount or number of shares to be
exchanged, and the names of the Security Funds from which and into which the
exchange is to be made, and such instructions must be received on a recorded
line. Neither the Funds, the Investment Manager, nor the Distributor will be
liable for any loss, liability, cost or expense arising out of any request,
including any fraudulent request provided the Investment Manager complied with
its procedures. Thus, a stockholder who authorizes telephone exchanges may bear
the risk of loss from a fraudulent or unauthorized request. This telephone
exchange privilege may be changed or discontinued at any time at the discretion
of the management of the Funds. In particular, the Funds may set limits on the
amount and frequency of such exchanges, in general or as to any individual who
abuses such privilege.
DIVIDENDS AND TAXES
The following summarizes certain federal income tax considerations generally
affecting the Funds and their stockholders. No attempt is made to present a
detailed explanation of the tax treatment of the Funds or their stockholders,
and the discussion here is not intended as a substitute for careful tax
planning. The discussion is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial and administrative ruling authorities, all of which are
subject to change, which change may be retroactive. Prospective investors should
consult their own tax advisors with regard to the federal tax consequences of
the purchase, ownership, and disposition of Fund shares, as well as the tax
consequences arising under the laws of any state, foreign country, or other
taxing jurisdiction.
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code"). To qualify as a regulated investment company, each Fund must, among
other things: (i) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities, or currencies ("Qualifying Income Test"); (ii) diversify
its holdings so that, at the end of each quarter of the taxable year, (a) at
least 50% of the market value of the Fund's assets is represented by cash, cash
items, U.S. Government securities, the securities of other regulated investment
companies, and other securities, with such other securities of any one issuer
limited for the purposes of this calculation to an amount not greater than 5% of
the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls (as that term is
defined in the relevant provisions of the Code) and which are determined to be
engaged in the same or similar trades or businesses or related trades or
businesses; and (iii) distribute at least 90% of the sum of its investment
company taxable income (which includes, among other items, dividends, interest,
and net short-term capital gains in excess of any net long-term capital losses)
and its net tax-exempt interest each taxable year. The Treasury Department is
authorized to promulgate regulations under which foreign currency gains would
constitute qualifying income for purposes of the Qualifying Income Test only if
such gains are directly related to investing in securities (or options and
futures with respect to securities). To date, no such regulations have been
issued.
A Fund qualifying as a regulated investment company generally will not be
subject to U.S. federal income tax on its investment company taxable income and
net capital gains (any net long-term capital gains in excess of the net
short-term capital losses), if any, that it distributes to shareholders. Each
Fund intends to distribute to its stockholders, at least annually, substantially
all of its investment company taxable income and any net capital gains.
Generally, regulated investment companies, like the Funds, must distribute
amounts on a timely basis in accordance with a calendar year distribution
requirement in order to avoid a nondeductible 4% excise tax. Generally, to avoid
the tax, a regulated investment company must distribute during each calendar
year, (i) at least 98% of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, (ii) at least 98% of its capital
gains in excess of its capital losses (adjusted for certain ordinary losses) for
the 12-month period ending on October 31 of the calendar year, and (iii) all
ordinary income and capital gains for previous years that were not distributed
during such years. To avoid application of the excise tax, each Fund intends to
make its distributions in accordance with the calendar year distribution
requirement. A distribution, including an "exempt-interest dividend," will be
treated as paid on December 31 of the calendar year if it is declared by a Fund
in October, November or December of that year to shareholders of record on a
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions are taxable to shareholders in the calendar
year in which the distributions are declared, rather than the calendar year in
which the distributions are received.
If, as a result of exchange controls or other foreign laws or restrictions
regarding repatriation of capital, a Fund were unable to distribute an amount
equal to substantially all of its investment company taxable income (as
determined for U.S. tax purposes) within applicable time periods, the Fund would
not qualify for the favorable federal income tax treatment afforded regulated
investment companies, or, even if it did so qualify, it might become liable for
federal taxes on undistributed income. In addition, the ability of a Fund to
obtain timely and accurate information relating to its investments is a
significant factor in complying with the requirements applicable to regulated
investment companies in making tax-related computations. Thus, if a Fund were
unable to obtain accurate information on a timely basis, it might be unable to
qualify as a regulated investment company, or its tax computations might be
subject to revisions (which could result in the imposition of taxes, interest
and penalties).
It is the policy of Diversified Income, High Yield and Municipal Bond Funds to
pay dividends from net investment income monthly. It is the policy of the Funds
to make distributions of realized capital gains (if any) in excess of any
capital losses and capital loss carryovers at least once a year. Because Class A
shares of the Funds bear most of the costs of distribution of such shares
through payment of a front-end sales charge, while Class B and Class C shares of
the Funds bear such costs through a higher distribution fee, expenses
attributable to Class B and Class C shares, generally will be higher and as a
result, income distributions paid by the Funds with respect to Class B and Class
C shares generally will be lower than those paid with respect to Class A shares.
All dividends and distributions are automatically reinvested on the payable date
in shares of the Fund at net asset value, as of the record date (reduced by an
amount equal to the amount of the dividend or distribution), unless the
Investment Manager is previously notified in writing by the stockholder that
such dividends or distributions are to be received in cash. A stockholder may
request that such dividends or distributions be directly deposited to the
stockholder's bank account. A stockholder who elected not to reinvest dividends
or distributions paid with respect to Class A shares may, at any time within
thirty days after the payment date, reinvest the dividend check without
imposition of a sales charge.
Cash Fund's policy is to declare daily dividends of all of its net investment
income each day the Fund is open for business, increased or decreased by any
realized capital gains or losses. Such dividends are automatically credited to
stockholder accounts. Unless stockholders elect to receive cash, they will
receive such dividends in additional shares on the first business day of each
month at the net asset value on that date. If cash is desired, investors may
indicate so in the appropriate section of the application and checks will be
mailed within five business days after the beginning of the month. The amount of
dividend may fluctuate from day to day. If on any day net realized or unrealized
losses on portfolio securities exceed Cash Fund's income for that day and
results in a decline of net asset value per share below $1.00, the dividend for
that day will be omitted until the net asset value per share subsequently
returns to $1.00 per share.
The Funds will not pay dividends or distributions of less than $25 in cash but
will automatically reinvest them. Distributions of net investment income and any
short-term capital gains by Income Fund or Cash Fund are taxable as ordinary
income whether received in cash or reinvested in additional shares. To the
extent that Municipal Bond Fund's dividends are derived from interest on its
temporary taxable investments or from an excess of net short-term capital gain
over net long-term capital loss, its dividends are taxable as ordinary income
whether received in cash or reinvested in additional shares. Such dividends do
not qualify for the dividends-received deduction for corporations.
The excess of net long-term capital gains over short-term capital losses
realized and distributed by the Funds or reinvested in Fund shares will
generally be taxable to shareholders as long-term capital gain. Net capital
gains from assets held for one year or less will be taxed as ordinary income.
Distributions will be subject to these capital gains rates regardless of how
long a shareholder has held Fund shares. Because Cash Fund normally will not
invest in securities having a maturity of more than one year, it should not
realize any long-term capital gains or losses. Advice as to the tax status of
each year's dividends and distributions will be mailed annually.
Municipal Bond Fund intends to qualify to pay "exempt-interest dividends" to its
stockholders. The Fund will be so qualified if, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
securities on which the interest payments are exempt from federal tax. To the
extent that Municipal Bond Fund's dividends distributed to stockholders are
derived from earnings on interest income exempt from federal tax and are
designated as "exempt-interest dividends" by the Fund, they will be excludable
from a stockholder's gross income for federal income tax purposes. Municipal
Bond Fund will inform stockholders annually as to the portion of that year's
distributions from the Fund which constituted "exempt-interest dividends."
Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent that the Fund receives income from municipal obligations
treated as a tax preference item for purposes of the alternative minimum tax, a
portion of the dividends paid by it, although otherwise exempt from federal
income tax, will be taxable to shareholders to the extent that their tax
liability will be determined under the alternative minimum tax. The Fund will
annually supply shareholders with a report indicating the percentage of Fund
income attributable to municipal obligations subject to the alternative minimum
tax. Additionally, taxpayers must disclose to the Internal Revenue Service on
their tax returns the entire amount of tax-exempt interest (including
exempt-interest dividends on shares of the Fund) received or accrued during the
year.
In addition, for corporations, the alternative minimum taxable income is
increased by a percentage of the amount by which an alternative measure of
income ("adjusted current earnings," referred to as "ACE") exceeds the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all exempt-interest dividends paid by
the Fund, is included in calculating ACE. Taxpayers that may be subject to the
alternative minimum tax should consult their tax advisers before investing in
the Municipal Bond Fund.
To the extent that Municipal Bond Fund's interest income is attributable to
private activity bonds, dividends allocable to such income, while exempt from
the regular federal income tax, may constitute an item of tax preference for
purposes of the alternative minimum tax. In addition, for corporate stockholders
of Municipal Bond Fund, exempt interest may comprise part or all of an
adjustment to alternative minimum taxable income.
Stockholders of the Funds who redeem their shares generally will realize gain or
loss upon the sale or redemption (including the exchange of shares for shares of
another fund) which will be capital gain or loss if the shares are capital
assets in the stockholder's hands, and will be taxable to stockholders as
long-term capital gains if the shares had been held for more than one year at
the time of sale or redemption. Net capital gains on shares held for less than
one year will be taxable to shareholders as ordinary income. Investors should be
aware that any loss realized upon the sale or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
distribution of long-term capital gain to the stockholder with respect to such
shares. In addition, any loss realized on a sale or exchange of shares will be
disallowed to the extent the shares disposed of are replaced within a period of
61 days, beginning 30 days before and ending 30 days after the date the shares
are disposed of, such as pursuant to the reinvestment of dividends. In such
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Under certain circumstances, the sales charge incurred in acquiring Class A
shares of a Fund may not be taken into account in determining the gain or loss
on the disposition of those shares. This rule applies in circumstances when
shares of the Fund are exchanged within 90 days after the date they were
purchased and new shares in a regulated investment company are acquired without
a sales charge or at a reduced sales charge. In that case, the gain or loss
recognized on the exchange will be determined by excluding from the tax basis of
the shares exchanged all or a portion of the sales charge incurred in acquiring
those shares. This exclusion applies to the extent that the otherwise applicable
sales charge with respect to the newly acquired shares is reduced as a result of
having incurred the sales charge initially. Instead, the portion of the sales
charge affected by this rule will be treated as an amount paid for the new
shares.
Up to 85% of an individual's Social Security benefits and certain railroad
retirement benefits may be subject to federal income tax. Along with other
factors, total tax-exempt income, including any exempt-interest dividends
received from Municipal Bond Fund, is used to calculate the portion of Social
Security benefits that is taxed.
Under the Internal Revenue Code, a stockholder may not deduct all or a portion
of interest on indebtedness incurred or continued to purchase or carry shares of
an investment company paying exempt-interest dividends. In addition, under rules
issued by the Internal Revenue Service for determining when borrowed funds are
considered used for the purposes of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
shares.
A deductible "environmental tax" of 0.12% is imposed on a corporation's modified
alternative minimum taxable income in excess of $2 million. The environmental
tax will be imposed even if the corporation is not required to pay an
alternative minimum tax because the corporation's regular income tax liability
exceeds its minimum tax liability. To the extent that exempt-interest dividends
paid by Municipal Bond Fund are included in alternative minimum taxable income,
corporate stockholders may be subject to the environmental tax.
Opinions relating to the validity of municipal securities and the exemption of
interest thereon from federal income tax are rendered by bond counsel to the
issuer. Neither the Investment Manager nor Municipal Bond Fund's counsel makes
any review of proceedings relating to the issuance of municipal securities or
the bases of such opinions.
The Funds are required by law to withhold 31% of taxable dividends and
distributions to stockholders who do not furnish their correct taxpayer
identification numbers, or are otherwise subject to the backup withholding
provisions of the Internal Revenue Code.
Each of Diversified Income Fund and High Yield Fund (the Series of Income Fund)
will be treated separately in determining the amounts of income and capital
gains distributions. For this purpose, each Fund will reflect only the income
and gains, net of losses of that Fund.
A purchase of shares shortly before payment of a dividend or distribution would
be disadvantageous because the dividend or distribution to the purchaser would
have the effect of reducing the per share net asset value of his or her shares
by the amount of the dividends or distributions. In addition all or a portion of
such dividends or distributions, although in effect a return of capital, are
subject to taxes, which may be at ordinary income tax rates.
OPTIONS, FUTURES AND FORWARD CONTRACTS AND SWAP AGREEMENTS -- Certain options,
futures contracts, and forward contracts in which a Fund may invest may be
"Section 1256 contracts." Gains or losses on Section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain Section 1256
contracts may be treated as ordinary income or loss. Also, Section 1256
contracts held by a Fund at the end of each taxable year (and at certain other
times as prescribed pursuant to the Code) are "marked to market" with the result
that unrealized gains or losses are treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures, forward
contracts, swap agreements and other financial contracts to a Fund are not
entirely clear. The transactions may increase the amount of short-term capital
gain realized by a Fund which is taxed as ordinary income when distributed to
shareholders.
A Fund may make one or more of the elections available under the Code which are
applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased as compared to a fund that
did not engage in such hedging transactions.
Because only a few regulations regarding the treatment of swap agreements, and
related caps, floors and collars, have been implemented, the tax consequences of
such transactions are not entirely clear. The Funds intend to account for such
transactions in a manner deemed by them to be appropriate, but the Internal
Revenue Service might not necessarily accept such treatment. If it did not, the
status of a Fund as a regulated investment company might be affected.
The requirements applicable to a Fund's qualification as a regulated investment
company may limit the extent to which a Fund will be able to engage in
transactions in options, futures contracts, forward contracts, swap agreements
and other financial contracts.
MARKET DISCOUNT -- If a Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount." If the amount of
market discount is more than a DE MINIMUS amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT -- Certain debt securities acquired by the Funds may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by a Fund, original issue discount that accrues on a debt security in a
given year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.
Some debt securities may be purchased by the Funds at a discount that exceeds
the original issue discount on such debt securities, if any. This additional
discount represents market discount for federal income tax purposes (see above).
CONSTRUCTIVE SALES -- Recently enacted rules may affect the timing and character
of gain if a Fund engages in transactions that reduce or eliminate its risk of
loss with respect to appreciated financial positions. If the Fund enters into
certain transactions in property while holding substantially identical property,
the Fund would be treated as if it had sold and immediately repurchased the
property and would be taxed on any gain (but no loss) from the constructive
sale. The character of gain from a constructive sale would depend upon the
Fund's holding period in the property. Loss from a constructive sale would be
recognized when the property was subsequently disposed of, and its character
would depend on the Fund's holding period and the application of various loss
deferral provisions of the Code.
FOREIGN TAXATION -- Income received by a Fund from sources within a foreign
country may be subject to withholding and other taxes imposed by that country.
Tax conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
The payment of such taxes will reduce the amount of dividends and distributions
paid to the Funds' stockholders. So long as a Fund qualifies as a regulated
investment company, certain distribution requirements are satisfied, and more
than 50% of such Fund's assets at the close of the taxable year consists of
securities of foreign corporation, the fund may elect, subject to limitation, to
pass through its foreign tax credits to its stockholders.
OTHER TAXES -- The foregoing discussion is general in nature and is not intended
to provide an exhaustive presentation of the tax consequences of investing in a
Fund. Distributions may also be subject to additional state, local and foreign
taxes, depending on each shareholder's particular situation. Depending upon the
nature and extent of a Fund's contacts with a state or local jurisdiction, the
Fund may be subject to the tax laws of such jurisdiction if it is regarded under
applicable law as doing business in, or as having income derived from, the
jurisdiction. Persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by private activity bonds should
consult their tax adviser before purchasing Municipal Bond Fund shares. (See
"Municipal Securities," page 8.) Shareholders are advised to consult their own
tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
ORGANIZATION
The Articles of Incorporation of Income and Municipal Bond Funds provide for the
issuance of shares of common stock in one or more classes or series and the
Articles of Cash Fund provide for the issuance of stock in one or more series.
Income Fund has authorized the issuance of an indefinite number of shares of
capital stock of $1.00 par value and currently issues its shares in three
series, Diversified Income Fund, High Yield Fund and Capital Preservation Fund.
The shares of each Series of Income Fund represent a pro rata beneficial
interest in that Series' net assets and in the earnings and profits or losses
derived from the investment of such assets. Municipal Bond and Cash Funds have
not issued shares in any additional series at the present time. Municipal Bond
and Cash Funds have authorized the issuance of an indefinite number of shares of
capital stock of $0.10 par value.
Municipal Bond Fund currently issues two classes of shares. Diversified Income
Fund and High Yield Fund currently issue three classes of shares. Each class
participate proportionately based on its relative net asset values in dividends
and distributions and has equal voting, liquidation and other rights except that
(i) expenses related to the distribution of each class of shares or other
expenses that the Board of Directors may designate as class expenses from time
to time, are borne solely by each class; (ii) each class of shares has exclusive
voting rights with respect to any Distribution Plan adopted for that class;
(iii) each class has different exchange privileges; and (iv) each class has a
different designation. When issued and paid for, the shares of Diversified
Income, High Yield, Municipal Bond and Cash Funds will be fully paid and
nonassessable by the Funds. Shares may be exchanged as described under "How to
Exchange Shares," page 42, but will have no other preference, conversion,
exchange or preemptive rights. Shares are transferable, redeemable and
assignable and have cumulative voting privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the Series
of Income Fund vote together with each share having one vote. On other matters
affecting a particular Series, such as the investment advisory contract or the
fundamental policies, only shares of that Series are entitled to vote, and a
majority vote of the shares of that Series is required for approval of the
proposal.
The Funds do not generally hold annual meetings of stockholders and will do so
only when required by law. Stockholders may remove directors from office by vote
cast in person or by proxy at a meeting of stockholders. Such a meeting will be
called at the written request of 10% of a Fund's outstanding shares.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT
UMB Bank, N.A., 928 Grand Avenue, Kansas City, Missouri 64106 acts as the
custodian for the portfolio securities of Diversified Income Fund, High Yield
Fund, Municipal Bond Fund and Cash Fund. Security Management Company, LLC acts
as the Funds' transfer and dividend-paying agent.
INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, One Kansas City Place, 1200 Main Street, Kansas
City, Missouri, has been selected by the Funds to serve as the Funds'
independent auditors, and as such, will perform the annual audit of each Fund's
financial statements.
PERFORMANCE INFORMATION
The Funds may, from time to time, include performance information in
advertisements, sales literature or reports to stockholders or prospective
investors. Performance information in advertisements or sales literature may be
expressed as yield for each of the Funds, effective yield for Cash Fund, taxable
equivalent yield for Municipal Bond Fund and average annual total return and
aggregate total return for Municipal Bond and Income Funds.
For Cash Fund, the current yield will be based upon the seven calendar days
ending on the date of calculation ("the base period"). The total net investment
income earned, exclusive of realized capital gains and losses or unrealized
appreciation and depreciation, during the base period, on a hypothetical
pre-existing account having a balance of one share will be divided by the value
of the account at the beginning of that period. The resulting figure ("the base
period return") will then be multiplied by 365/7 to obtain the current yield.
Cash Fund's current yield for the seven-day period ended December 31, 1999 was
5.28%.
Cash Fund's effective (or compound) yield for the same period was 5.42%. The
effective yield reflects the compounding of the current yield by reinvesting all
dividends and will be computed by compounding the base period return by adding 1
to the base period return, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result. The yield of the Fund may be obtained by
calling the Fund.
Investors should recognize that investment in Cash Fund is not guaranteed or
insured by any state, federal or government agency or by any other person.
With respect to Income Fund and Municipal Bond Fund, quotations of yield will be
based on the investment income per share earned during a particular 30-day
period, less expenses per share accrued during the period ("net investment
income") and will be computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
A - B
YIELD = 2[( ----- + 1)^6 - 1]
CD
where A = dividends and interest earned during the period, B = expenses accrued
for the period (net of any reimbursements), C = the average daily number of
shares outstanding during the period that were entitled to receive dividends,
and D = the maximum offering price per share on the last day of the period.
Municipal Bond Fund's tax-equivalent yield, like yield, is based on a 30-day
period and is computed by dividing that portion of the Fund's yield (computed as
described above) which is tax-exempt by one minus a stated income tax rate and
adding the resulting figure to that portion of the Fund's yield, if any, that is
not tax-exempt.
For the 30-day period ended December 31, 1999, the yield for each Fund was the
following:
----------------------------------------------------
CLASS A CLASS B
----------------------------------------------------
Diversified Income Fund 5.77% 5.22%
High Yield Fund 9.43% 8.90%
Municipal Bond Fund 4.31% 3.83%
----------------------------------------------------
For the same period, the tax equivalent yield for the Class A shares of
Municipal Bond Fund assuming a 15% income tax rate and a 28% income tax rate,
respectively, was 5.07% and 5.99%.
For the same period, the tax equivalent yield for the Class B shares of
Municipal Bond Fund assuming a 15% income tax rate and a 28% income tax rate,
respectively, was 4.51% and 5.32%.
There is no assurance that a yield quoted will remain in effect for any period
of time. Inasmuch as certain estimates must be made in computing average daily
yield, actual yields may vary and will depend upon such factors as the type of
instruments in the Fund's portfolio, the portfolio quality and average maturity
of such instruments, changes in interest rates and the actual Fund expenses.
Yield computations will reflect the expense limitations described in this
Prospectus under "Investment Manager."
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in
Diversified Income Fund, High Yield Fund or Municipal Bond Fund over periods of
1, 5 and 10 years (up to the life of the Fund), calculated pursuant to the
following formula:
P(1 + T)^n = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years, and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All average
annual total return figures will reflect the deduction of the maximum initial
sales load in the case of quotations of performance of Class A shares or the
applicable contingent deferred sales charge in the case of quotations of
performance of Class B shares and a proportional share of Fund expenses on an
annual basis, and assume that all dividends and distributions are reinvested
when paid.
For the 1-, 5- and 10-year periods ended December 31, 1999, the average annual
total return for each Fund was the following:
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
---------------- ----------------- -----------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B A B A B
--------------------------------------------------------------------------------
Diversified Income Fund (8.23)% (9.36)% 6.17% 5.79% 6.35% 3.20%(1)
High Yield Fund (5.23)% (6.28)% 4.93%(2) 4.77%(2) --- ---
Municipal Bond Fund (8.03)% (8.96)% 4.57% 4.11% 5.07% .89%(1)
--------------------------------------------------------------------------------
1 From October 19, 1993 (date of inception) to December 31, 1999
2 From August 5, 1996 (date of inception) to December 31, 1999
--------------------------------------------------------------------------------
The aggregate total return for Income and Municipal Bond Funds is calculated for
any specified period of time pursuant to the following formula:
P(1 + T)^n = ERV
(where P = a hypothetical initial payment of $1,000, T = the total return, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). All aggregate total return figures will assume that
all dividends and distributions are reinvested when paid. The Funds may, from
time to time, include quotations of total return that do not reflect deduction
of the sales load which, if reflected, would reduce the total return data
quoted.
For the periods ended December 31, 1999, the aggregate total return on an
investment for each Fund calculated as described above was the following:
-----------------------------------------------------------
CLASS A CLASS B
-----------------------------------------------------------
Diversified Income Fund 94.1%(1) 21.6%(2)
High Yield Fund 23.7%(3) 20.2%(3)
Municipal Bond Fund 72.1%(1) 12.3%(2)
-----------------------------------------------------------
1 From December 31, 1989
2 From October 19, 1993
3 From August 5, 1996 (date of inception)
-----------------------------------------------------------
These figures reflect deduction of the maximum initial sales load and deduction
of the maximum contingent deferred sales charge. Fee waivers and/or expense
reimbursements were in effect for each of the Funds in the year ended December
31, 1999. In the absence of the waivers and/or reimbursements, the yield and
performance quoted above would be reduced.
Quotations of yield, tax-equivalent yield, average annual total return and
aggregate total return will reflect only the performance of a hypothetical
investment during the particular time period shown. Such quotations will vary
based on changes in market conditions and the level of the Fund's expenses, and
no reported performance figure should be considered an indication of performance
which may be expected in the future.
In connection with communicating its yield, tax-equivalent yield, average annual
total return or aggregate total return to current or prospective stockholders,
each Fund also may compare these figures to the performance of other mutual
funds tracked by mutual fund rating services or to other unmanaged indexes which
may assume reinvestment of dividends but generally do not reflect deductions for
administrative and management costs. Each Fund will include performance data for
each class of shares of the Fund in any advertisement or report including
performance data of the Fund. Such mutual fund rating services include the
following: Lipper Analytical Services; Morningstar, Inc.; Investment Company
Data; Schabacker Investment Management; Wiesenberger Investment Companies
Service; Computer Directions Advisory (CDA); and Johnson Charts.
RETIREMENT PLANS
Diversified Income, High Yield and Cash Funds offer tax-qualified retirement
plans for individuals (Individual Retirement Accounts, known as IRAs), Roth
IRAs, SIMPLE IRAs, several prototype retirement plans for the self-employed
(Keogh plans), pension and profit-sharing plans for corporations, and custodial
account plans for employees of public school systems and organizations meeting
the requirements of Section 501(c)(3) of the Internal Revenue Code. Actual
documents and detailed materials about the plans will be provided upon request
to the Distributor.
Purchases of Diversified Income, High Yield and Cash Fund shares under any of
these plans are made at the public offering price next determined after
contributions are received by the Distributor. Shares owned under any of the
plans have full dividend, voting and redemption privileges. Depending upon the
terms of the particular plan, retirement benefits may be paid in a lump sum or
in installment payments over a specified period. There are possible penalties
for premature distributions from such plans.
Security Management Company, LLC is available to act as custodian for the plans
on a fee basis. For IRAs, Roth IRAs, SIMPLE IRAs, and Simplified Employee
Pension Plans (SEPPs), service fees for such custodial services currently are:
(1) $10 for annual maintenance of the account, and (2) benefit distribution fee
of $5 per distribution. Service fees for Section 403(b) Retirement Plans are set
forth in "403(b) Retirement Plans," page 52. Service fees for other types of
plans will vary. These fees will be deducted from the plan assets. Optional
supplemental services are available from Security Benefit Life Insurance Company
for additional charges.
Retirement investment programs involve commitments covering future years. It is
important that the investment objective and structure of Diversified Income,
High Yield and Cash Funds be considered by the investors for such plans.
Investments in insurance and annuity contracts also may be purchased in addition
to shares of the Funds.
A brief description of the available tax-qualified retirement plans is provided
below. However, the tax rules applicable to such qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made to provide more than general information about the various
types of qualified plans. Because Municipal Bond Fund's investment objective is
to obtain a high level of interest income exempt from federal taxes, Municipal
Bond Fund is not an appropriate investment for retirement plans.
Investors are urged to consult their own attorneys or tax advisers when
considering the establishment and maintenance of any such plans.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Individual Retirement Account Custodial Agreements are available to provide
investment in shares of Diversified Income, High Yield and/or Cash Funds, or in
other funds in the Security Group. An individual may initiate an IRA through the
Distributor by executing the custodial agreement and making a minimum initial
investment of at least $100. A $10 annual fee is charged for maintaining the
account.
An individual may make a contribution to a traditional IRA each year of up to
the lesser of $2,000 or 100% of earned income under current tax law. The IRAs
described in this paragraph are called "traditional IRAs" to distinguish them
from the "Roth IRAs" which are described below. Spousal IRAs allow an individual
and his or her spouse to contribute up to $2,000 to their respective IRAs so
long as a joint tax return is filed and joint income is $4,000 or more. The
maximum amount the higher compensated spouse may contribute for the year is the
lesser of $2,000 or 100% of that spouse's compensation. The maximum the lower
compensated spouse may contribute is the lesser of (i) $2,000 or (ii) 100% of
that spouse's compensation plus the amount by which the higher compensated
spouse's compensation exceeds the amount the higher compensated spouse
contributes to his or her IRA.
An individual may make a contribution to a traditional IRA which is deductible
for federal income tax purposes. A contribution is deductible if (i) neither the
individual nor his or her spouse is an active participant in an employer's
retirement plan, or (ii) the individual (and his or her spouse, if applicable)
has an adjusted gross income below a specified level. The income limits began
gradually increasing starting with tax years beginning in 1998, eventually
reaching $50,000-$60,000 for single filers in 2005 and thereafter (and reaching
$80,000-$100,000 if married filing jointly in 2007 and thereafter). In addition,
for tax years beginning after 1997, a married individual may make a deductible
IRA contribution even though the individual's spouse is an active participant in
a qualified employer's retirement plan, subject to a phase-out for adjusted
gross income between $150,000-$160,000. However, an individual not permitted to
make a deductible contribution to an IRA may nevertheless make nondeductible
contributions up to the maximum contribution limit for that year. The
deductibility of IRA contributions under state law varies from state to state.
Contributions must be made in cash no later than April 15 following the close of
the tax year. No annual contribution is permitted for the year in which the
investor reaches age 70 1/2 or any year thereafter.
In addition to annual contributions, total distributions and certain partial
distributions from certain employer-sponsored retirement plans may be eligible
to be reinvested into a traditional IRA if the reinvestment is made within 60
days of receipt of the distribution by the taxpayer. Such rollover contributions
are not subject to the limitations on annual IRA contributions described above.
ROTH IRAS
Section 408A of the Code permits eligible individuals to establish a Roth IRA
for tax years beginning in 1998. Contributions to a Roth IRA are not deductible,
but withdrawals that meet certain requirements are not subject to federal income
tax. The maximum annual contribution amount of $2,000 is phased out if the
individual is single and has an adjusted gross income between $95,000 and
$110,000, or if the individual is married and the couple has a combined adjusted
gross income between $150,000 and $160,000. In general, Roth IRAs are subject to
certain required distribution requirements. Unlike a traditional IRA, Roth IRAs
are not subject to minimum required distribution rules during the owner's
lifetime. Generally, however, the amount remaining in a Roth IRA must be
distributed by the end of the fifth year after the death of the owner.
The owner of a traditional IRA may convert the traditional IRA into a Roth IRA
under certain circumstances. The conversion of a traditional IRA to a Roth IRA
will subject the amount of the converted traditional IRA to federal income tax.
If a traditional IRA is converted to a Roth IRA, the taxable amount in the
owner's traditional IRA will be considered taxable income for federal income tax
purposes for the year of the conversion. Generally, all amounts in a traditional
IRA are taxable except for the owner's prior non-deductible contributions to the
traditional IRA.
EDUCATION IRAS
Section 530 of the Code permits eligible individuals to establish an Education
IRA on behalf of a beneficiary for tax years beginning in 1998. Contributions to
an Education IRA are not deductible, but qualified distributions to the
beneficiary are not subject to federal income tax. The maximum annual
contribution amount of $500 is phased out if the individual is single and has an
adjusted gross income between $95,000 and $110,000, or if the individual is
married and the couple has a combined adjusted gross income between $150,000 and
$160,000. Education IRAs are subject to certain required distribution
requirements. Generally, the amount remaining in an Education IRA must be
distributed by the beneficiary's 30th birthday or rolled into a new Education
IRA for another eligible beneficiary.
SIMPLE IRAS
The Small Business Job Protection Act of 1996 created a new retirement plan, the
Savings Incentive Match Plan for Employees of Small Employers (SIMPLE Plans).
SIMPLE Plan participants must establish a SIMPLE IRA into which plan
contributions will be deposited.
The Investment Manager makes available SIMPLE IRAs to provide investment in
shares of the Funds. Contributions to a SIMPLE IRA may be either salary deferral
contributions or employer contributions. Contributions must be made in cash and
cannot exceed the maximum amount allowed under the Internal Revenue Code. On a
pre-tax basis, up to $6,000 of compensation (through salary deferrals) may be
contributed to a SIMPLE IRA. In addition, employers are required to make either
(1) a dollar-for-dollar matching contribution or (2) a nonelective contribution
to each participant's account each year. In general, matching contributions must
equal up to 3% of compensation, but under certain circumstances, employers may
make lower matching contributions. Instead of the match, employers may make a
nonelective contribution equal to 2% of compensation (compensation for purposes
of any nonelective contribution is limited to $160,000, as indexed).
Distributions from a SIMPLE IRA are (1) taxed as ordinary income; (2) includable
in gross income; and (3) subject to applicable state tax laws.
Distributions prior to age 59 1/2 may be subject to a 10% penalty tax which
increases to 25% for distributions made before a participant has participated in
the SIMPLE Plan for at least two years. An annual fee of $10 is charged for
maintaining the SIMPLE IRA.
PENSION AND PROFIT-SHARING PLANS
Prototype corporate pension or profit-sharing prototype plans meeting the
requirements of Internal Revenue Code Section 401(a) are available. Information
concerning these plans may be obtained from Security Distributors, Inc.
403(B) RETIREMENT PLANS
Employees of public school systems and tax-exempt organizations meeting the
requirements of Internal Revenue Code Section 501(c)(3) may purchase custodial
account plans funded by their employers with shares of Diversified Income and/or
High Yield Funds or other funds in the Security Group in accordance with Code
Section 403(b). Class A shares may not be available to custodial account plans
opened on or after June 5, 2000. The minimum initial or subsequent investment in
a custodial account plan is $50. An annual administration fee of $25 is required
for each custodial account with a balance less than $25,000 and a $5 withdrawal
fee will be charged when any custodial account is closed.
Employees who purchase custodial account plans may request loans from their
custodial accounts. An administration fee of $125 will be charged at the time of
application for a loan and a $50 loan maintenance fee will be deducted each year
from the account balance. Loan repayments will be treated as purchases for the
purpose of determining any applicable deferred sales charge. See "How to
Purchase Shares," page 28, for a discussion of the application of deferred sales
charges to Class B and Class C shares. Loans may not be available from certain
accounts, including those opened prior to June 5, 2000. Please contact Security
Management Company, LLC concerning loan availability.
Section 403(b) plans are subject to numerous restrictions on the amount that may
be contributed, the persons who are eligible to participate, the time when
distributions may commence, and the number and amount of any loans requested.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEPPS)
A prototype SEPP is available for corporations, partnerships or sole proprietors
desiring to adopt such a plan for purchases of IRAs for their employees.
Employers establishing a SEPP may contribute a maximum of $30,000 a year to an
IRA for each employee. This maximum is subject to a number of limitations.
FINANCIAL STATEMENTS
The audited financial statements of the Funds, which are contained in the Funds'
Annual Report dated December 31, 1999, are incorporated herein by reference.
Copies of the Annual Report are provided to every person requesting the
Statement of Additional Information.
TAX-EXEMPT VS. TAXABLE INCOME
The following table shows the approximate taxable yields for individuals that
are equivalent to tax-exempt yields using the 1999 tax rates contained in the
Code. The table illustrates what you would have to earn on taxable investments
to equal a given tax-exempt yield in your federal income tax bracket. Locate
your income (after deductions and exemptions), then locate your tax bracket
based on joint or single tax filing. Read across to the equivalent taxable yield
you would need to match a given tax-free yield. There is, of course, no
assurance that an investment in Municipal Bond Fund will result in the
realization of any particular return.
<TABLE>
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
IF YOUR TAXABLE INCOME IS: YOUR AND A TAX-FREE YIELD OF:
---------------------------------------------- INCOME TAX ------------------------------------------------------------------------
JOINT RETURN SINGLE RETURN BRACKET IS 5% 6% 7% 8% 9% 10% 11% 12%
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999
0 - 43,050 0 - 25,750 15.0% 5.88 7.06 8.24 9.41 10.59 11.76 12.94 14.12
43,051 - 104,050 25,751 - 62,450 28.0 6.94 8.33 9.72 11.11 12.50 13.89 15.28 16.67
104,051 - 158,550 62,451 - 130,250 31.0 7.25 8.70 10.14 11.59 13.04 14.49 15.94 17.39
158,551 - 283,150 130,251 - 283,150 36.0 7.81 9.38 10.94 12.50 14.06 15.63 17.19 18.75
283,151 and over 283,151 and over 39.6 8.28 9.93 11.59 13.25 14.90 16.56 18.21 19.87
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
APPENDIX A
--------------------------------------------------------------------------------
CLASS A SHARES OF DIVERSIFIED INCOME, HIGH YIELD AND MUNICIPAL BOND FUNDS
REDUCED SALES CHARGES -- Initial sales charges may be reduced or eliminated for
persons or organizations purchasing Class A shares of Diversified Income, High
Yield and Municipal Bond Funds alone or in combination with Class A shares of
other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made pursuant
to Rights of Accumulation, a Statement of Intention or Letters of Intent, the
term "Purchaser" includes the following persons: an individual; his or her
spouse and children under the age 21; a trustee or other fiduciary of a single
trust estate or single fiduciary account established for their benefit; an
organization exempt from federal income tax under Section 501(c)(3) or (13) of
the Internal Revenue Code; or a pension, profit-sharing or other employee
benefit plan whether or not qualified under Section 401 of the Internal Revenue
Code.
RIGHTS OF ACCUMULATION -- To reduce sales charges on purchases of Diversified
Income Fund, High Yield Fund or Municipal Bond Fund, a Purchaser may combine all
previous purchases with a contemplated current purchase of Class A shares of a
Fund for the purpose of determining the sales charge applicable to the current
purchase. For example, an investor who already owns Class A shares of a Fund
either worth $30,000 at the applicable current offering price or purchased for
$30,000 and who invests an additional $25,000, is entitled to a reduced sales
charge of 3.75% on the latter purchase. The Distributor must be notified when a
sale takes place which would qualify for the reduced charge on the basis of
previous purchases subject to confirmation of the investor's holdings through
the Fund's records. Rights of accumulation apply also to purchases representing
a combination of the Class A shares of Diversified Income Fund, High Yield Fund,
Municipal Bond Fund, Security Growth and Income, Security Ultra Fund, or
Security Equity Fund in those states where shares of the Funds being purchased
are qualified for sale.
STATEMENT OF INTENTION -- A Purchaser in Diversified Income, High Yield or
Municipal Bond Fund may sign a Statement of Intention, which may be signed
within 90 days after the first purchase to be included thereunder, in the form
provided by the Distributor covering purchases of Diversified Income Fund, High
Yield Fund, Municipal Bond Fund, Security Equity Fund, Security Growth and
Income Fund, or Security Ultra Fund to be made within a period of 13 months (or
a 36-month period for purchases of $1 million or more) and thereby become
eligible for the reduced front-end sales charge applicable to the actual amount
purchased under the Statement. Five percent of the amount specified in the
Statement of Intention will be held in escrow shares until the Statement is
completed or terminated. The shares so held may be redeemed by the Fund if the
investor is required to pay additional sales charge which may be due if the
amount of purchases made by the investor during the period the Statement is
effective is less than the total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or, if
applicable, 36-month period). Additional Class A shares received from
reinvestment of income dividends and capital gains distributions (if any are
realized) are included in the total amount used to determine reduced sales
charges. The Statement is not a binding obligation upon the investor to purchase
or any Fund to sell the full indicated amount. An investor considering signing
such an agreement should read the Statement of Intention carefully. A Statement
of Intention form may be obtained from the Investment Manager.
REINSTATEMENT PRIVILEGE -- Stockholders who redeem their Class A shares of
Diversified Income Fund, High Yield Fund or Municipal Bond Fund have a one-time
privilege (1) to reinstate their accounts by purchasing shares of the Fund
without a sales charge up to the dollar amount of the redemption proceeds, or
(2) to the extent the redeemed shares would have been eligible for the exchange
privilege, to purchase Class A shares of another of the Funds, Security Equity
Fund, Security Ultra Fund, or Security Growth and Income Fund up to the dollar
amount of the redemption proceeds at a sales charge equal to the additional
sales charge, if any, which would have been applicable had the redeemed shares
been exchanged pursuant to the exchange privilege. Written notice and a check in
the amount of the reinvestment from eligible stockholders wishing to exercise
this reinstatement privilege must be received by the Fund within thirty days
after the redemption request was received (or such longer period as may be
permitted by rules and regulations promulgated under the Investment Company Act
of 1940). The net asset value used in computing the amount of shares to be
issued upon reinstatement or exchange will be the net asset value on the day
that notice of the exercise of the privilege is received. Stockholders making
use of the reinstatement privilege should note that any gains realized upon the
redemption will be taxable while any losses may be deferred under the "wash
sale" provision of the Internal Revenue Code.
<PAGE>
--------------------------------------------------------------------------------
SECURITY INCOME FUND
* CAPITAL PRESERVATION SERIES
Member of The Security Benefit Group of Companies
700 SW Harrison, Topeka, Kansas 66636-0001
(785) 431-3127
(800) 888-2461
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the Prospectus dated February 1, 2000, as it may be
supplemented from time to time. A Prospectus may be obtained by writing Security
Distributors, Inc., 700 SW Harrison, Topeka, Kansas 66636-0001, or by calling
(785) 431-3127 or (800) 888-2461, ext. 3127.
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 1, 2000, AS SUPPLEMENTED JULY 26, 2000
RELATING TO THE PROSPECTUS DATED FEBRUARY 1, 2000,
AS IT MAY BE SUPPLEMENTED FROM TIME TO TIME
--------------------------------------------------------------------------------
FUND ADMINISTRATOR
Security Management Company, LLC
700 SW Harrison Street
Topeka, Kansas 66636-0001
DISTRIBUTOR
Security Distributors, Inc.
700 SW Harrison Street
Topeka, Kansas 66636-0001
CUSTODIAN
UMB Bank, N.A.
928 Grand Avenue
Kansas City, Missouri 64106
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
2001 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
TABLE OF CONTENTS
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS........................... 4
Investment Objective..................................................... 4
Investment Policies...................................................... 4
SHORT-TERM INSTRUMENTS................................................. 4
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES....................... 5
COMMERCIAL PAPER....................................................... 5
U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES........................ 5
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES............................. 5
U.S. DOLLAR-DENOMINATED SOVEREIGN AND SUPRANATIONAL FIXED INCOME
SECURITIES........................................................... 5
MORTGAGE-AND ASSET-BACKED SECURITIES................................... 5
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")........................... 6
ZERO-COUPON SECURITIES................................................. 7
WRAPPER AGREEMENTS..................................................... 7
RISKS OF WRAPPER AGREEMENTS............................................ 8
ILLIQUID SECURITIES.................................................... 9
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES............................ 10
U.S. GOVERNMENT OBLIGATIONS............................................ 10
LOWER-RATED DEBT SECURITIES ("JUNK BONDS")............................. 10
HEDGING STRATEGIES..................................................... 11
FUTURES CONTRACTS AND OPTIONS AND FUTURES CONTRACTS - GENERAL.......... 11
FUTURES CONTRACTS...................................................... 11
OPTIONS ON FUTURES CONTRACTS........................................... 12
OPTIONS ON SECURITIES.................................................. 13
GLOBAL ASSET ALLOCATION STRATEGY ("GAA STRATEGY")...................... 14
REPURCHASE AGREEMENTS.................................................. 16
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS......................... 16
BORROWING.............................................................. 16
ASSET COVERAGE......................................................... 16
Rating Services.......................................................... 16
Investment Restrictions.................................................. 16
FUNDAMENTAL RESTRICTIONS............................................... 17
NON-FUNDAMENTAL RESTRICTIONS........................................... 17
Portfolio Transactions and Brokerage Commissions......................... 18
PERFORMANCE INFORMATION.................................................... 19
Standard Performance Information......................................... 19
YIELD.................................................................. 19
TOTAL RETURN........................................................... 19
PERFORMANCE RESULTS.................................................... 20
Comparison of Fund Performance........................................... 20
Economic and Market Information.......................................... 20
VALUATION OF ASSETS; REDEMPTIONS IN KIND................................... 20
Overview of TSA Accounts................................................. 21
OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS.................... 22
Types of Individual Retirement Accounts.................................. 22
TRADITIONAL IRAS....................................................... 22
ROTH IRAS.............................................................. 22
SIMPLE IRAS............................................................ 23
KEOGH PLANS............................................................ 23
EDUCATION IRAS......................................................... 23
OWNERSHIP OF SHARES THROUGH PLANS.......................................... 24
QUALIFIED REDEMPTIONS...................................................... 24
Traditional IRAs, SEP-IRAs and SIMPLE IRAs............................... 25
Roth IRAs................................................................ 25
Keogh Plans.............................................................. 26
Education IRAs........................................................... 26
HOW TO PURCHASE SHARES..................................................... 26
Alternative Purchase Options............................................. 27
CLASS A SHARES - FRONT-END LOAD OPTION................................. 27
CLASS B SHARES - BACK-END LOAD OPTION.................................. 27
CLASS C SHARES - LEVEL LOAD OPTION..................................... 27
Class A Shares........................................................... 27
Class A Distribution Plan................................................ 27
Class B Shares........................................................... 28
Class B Distribution Plan................................................ 28
Class C Shares........................................................... 29
Class C Distribution Plan................................................ 29
Calculation and Waiver of Contingent Deferred Sales Charges.............. 29
Arrangements with Broker-Dealers and Others.............................. 29
Purchases at Net Asset Value............................................. 30
MANAGEMENT OF THE FUND AND TRUST........................................... 30
Directors and Officers of Security Income Fund........................... 31
Trustees of BT Investment Portfolios..................................... 32
Officers of BT Investment Portfolios..................................... 33
Security Income Fund Director Compensation Table......................... 33
BT Investment Portfolio Trustee Compensation Table....................... 34
Investment Adviser....................................................... 34
Administrator............................................................ 35
Custodian and Transfer Agent............................................. 36
Banking Regulatory Matters............................................... 36
Independent Auditors..................................................... 36
ORGANIZATION OF SECURITY INCOME FUND....................................... 36
ORGANIZATION OF THE TRUST.................................................. 37
TAXATION .................................................................. 37
Taxation of the Fund..................................................... 37
Taxation of the Portfolio................................................ 38
Other Taxation........................................................... 39
Foreign Withholding Taxes................................................ 39
FINANCIAL STATEMENTS....................................................... 39
APPENDIX A................................................................. 40
Description of Moody's Corporate Bond Ratings............................ 40
Description of S&P's Corporate Bond Ratings.............................. 40
Duff & Phelps' Long-Term Debt Ratings.................................... 41
Description of Moody's Short-Term Ratings................................ 41
Description of S&P Short-Term Issuer Credit Ratings...................... 42
Description of Duff & Phelps' Commercial Paper Ratings................... 42
Description of Moody's Insurance Financial Strength Ratings.............. 42
Description of S&P Claims Paying Ability Rating Definitions.............. 43
Duff & Phelps' Claims Paying Ability Ratings............................. 43
APPENDIX B................................................................. 44
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
Security Capital Preservation Fund (the "Fund") is a separate series of Security
Income Fund, an open-end, management investment company (mutual fund) of the
series type, offering shares of the Fund ("Shares") as described herein.
As described in the Fund's Prospectus, the Fund seeks to achieve its
investment objective by investing all its net investable assets (the "Assets")
in PreservationPlus Income Portfolio (the "Portfolio"), a diversified open-end
management investment company having the same investment objective as the Fund.
The Portfolio is a separate subtrust of BT Investment Portfolios, a New York
master trust fund (the "Portfolio Trust").
Because the investment characteristics of the Fund correspond directly to
those of the Portfolio (in which the Fund invests all of its assets), the
following is a discussion of the various investments of and techniques employed
by the Portfolio. The Fund has been established to serve as an alternative
investment to short-term bond funds and money market funds. In addition, since
to date, there has been no comparable investment substitute for those
individuals who are "rolling" assets over from the stable value or guaranteed
investment contract ("GIC") option of their employee benefit plans (such as
401(k) plans), the Fund is designed to be that comparable alternative.
Shares of the Fund are sold by Security Distributors, Inc., the Fund's
distributor (the "Distributor"), solely to tax-sheltered annuity custodial
accounts as defined in Section 403(b)(7) of the Internal Revenue Code of 1986,
as amended (the "Code"), individual retirement accounts as defined in Section
408 of the Code including "SIMPLE IRAs" and "SEP IRAs", Roth IRAs as defined in
Section 408A of the Code, education individual retirement accounts as defined in
Section 530 of the Code and "Keogh Plans" (sometimes collectively referred to
herein as "IRAs"), and to employees investing through participant-directed
employee benefit plans (each a "Plan" and together "Plans"). Shares are offered
to Plans either directly, or through vehicles such as bank collective funds or
insurance company separate accounts consisting solely of such Plans. Shares are
also available to employee benefit plans which invest in the Fund through an
omnibus account or similar arrangement.
The Fund's Prospectus (the "Prospectus") is dated February 1, 2000. The
Prospectus provides the basic information investors should know before investing
and may be obtained without charge by calling the Distributor at 1-800-888-2461
extension 3127. This Statement of Additional Information ("SAI"), which is not a
prospectus, is intended to provide additional information regarding the
activities and operations of the Fund and the Portfolio and should be read in
conjunction with the Prospectus. This SAI is not an offer by the Fund to an
investor that has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings ascribed to them in the Prospectus.
INVESTMENT OBJECTIVE -- The investment objective of the Fund is a high level of
current income while seeking to maintain a stable net asset value per Share.
There can, of course, be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICIES --The Fund seeks to achieve its investment objective by
investing all of its Assets in the Portfolio. The Fund's investment in the
Portfolio may be withdrawn at any time if the Board of Directors of Security
Income Fund determines that it is in the best interests of the Fund to do so.
The Portfolio's investment objective is a high level of current income while
seeking to maintain a stable net asset value per Share. The Portfolio expects to
invest primarily in fixed income securities ("Fixed Income Securities") of
varying maturities rated, at the time of purchase, in one of the top four
long-term rating categories by Standard & Poor's Ratings Services ("S&P"),
Moody's Investors Service, Inc. ("Moody's"), or Duff & Phelps Credit Rating Co.,
or comparably rated by another nationally recognized statistical rating
organization ("NRSRO"), or, if not rated by a NRSRO, of comparable quality as
determined by Bankers Trust in its sole discretion.
In addition, the Portfolio will enter into contracts ("Wrapper Agreements")
with insurance companies, banks or other financial institutions ("Wrapper
Providers") that are rated, at the time of purchase, in one of the top two
long-term rating categories by Moody's or S&P. There is no active trading market
for Wrapper Agreements, and none is expected to develop; therefore, they will be
considered illiquid. At the time of purchase, the value of all of the Wrapper
Agreements and any other illiquid securities will not exceed 15% of the
Portfolio's net assets.
The following is a discussion of the various investments of and techniques
employed by the Portfolio.
SHORT-TERM INSTRUMENTS. The Portfolio's assets may be invested in high
quality short-term investments with remaining maturities of 397 days or less to
maintain the Liquidity Reserve (as defined below), to meet anticipated
redemptions and expenses for day-to-day operating purposes and when, in the
opinion of Bankers Trust Company, the Portfolio's investment adviser (the
"Adviser" or "Bankers Trust"), it is advisable to adopt a temporary defensive
position because of unusual and adverse conditions affecting the respective
markets. The Portfolio may hold short-term investments consisting of foreign and
domestic (i) short-term obligations of sovereign governments, their agencies,
instrumentalities, authorities or political subdivisions; (ii) other short-term
debt securities rated in one of the top two short-term rating categories by an
NRSRO or, if unrated, of comparable quality in the opinion of the Adviser; (iii)
commercial paper; (iv) bank obligations, including negotiable certificates of
deposit, time deposits and bankers' acceptances; and (v) repurchase agreements.
At the time the Portfolio invests in commercial paper, bank obligations or
repurchase agreements, the issuer or the issuer's parent must have an
outstanding long-term debt rating of A or higher by Standard & Poor's Ratings
Group ("S&P") or A-2 or higher by Moody's Investors Service, Inc. ("Moody's") or
outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1 by
Moody's; or, if no such ratings are available, the instrument must be of
comparable quality in the opinion of the Adviser.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
For a description of commercial paper ratings, see the Appendix.
U.S. DOLLAR-DENOMINATED FIXED INCOME SECURITIES. Bonds and other debt
instruments are used by issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest but are purchased at a discount from their face values.
Debt securities, loans and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
U.S. DOLLAR-DENOMINATED FOREIGN SECURITIES. The Portfolio may invest a
portion of its assets in the dollar-denominated debt securities of foreign
companies. Investing in the securities of foreign companies involves more risks
than investing in securities of U.S. companies. Their value is subject to
economic and political developments in the countries where the companies operate
and to changes in foreign currency values. Values may also be affected by
foreign tax laws, changes in foreign economic or monetary policies, exchange
control regulations and regulations involving prohibitions on the repatriation
of foreign currencies.
In general, less information may be available about foreign companies than
about U.S. companies, and foreign companies are generally not subject to the
same accounting, auditing and financial reporting standards as are U.S.
companies. Foreign securities markets may be less liquid and subject to less
regulation than the U.S. securities markets. The costs of investing outside the
United States frequently are higher than those in the United States. These costs
include relatively higher brokerage commissions and foreign custody expenses.
U.S. DOLLAR-DENOMINATED SOVEREIGN AND SUPRANATIONAL FIXED INCOME SECURITIES.
Debt instruments issued or guaranteed by foreign governments, agencies and
supranational organizations ("sovereign debt obligations"), especially sovereign
debt obligations of developing countries, may involve a high degree of risk. The
issuer of the obligation or the governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and interest
when due and may require renegotiation or rescheduling of debt payments. In
addition, prospects for repayment of principal and interest may depend on
political as well as economic factors.
MORTGAGE- AND ASSET-BACKED SECURITIES. The Portfolio may purchase
mortgage-backed securities issued by the U.S. government, its agencies or
instrumentalities and non-governmental entities such as banks, mortgage lenders
or other financial institutions. Mortgage-backed securities include mortgage
pass-through securities, mortgage-backed bonds and mortgage pay-through
securities. A mortgage pass-through security is a pro rata interest in a pool of
mortgages where the cash flow generated from the mortgage collateral is passed
through to the security holder. A mortgage-backed bond is a general obligation
of the issuer, payable out of the issuer's general funds and additionally
secured by a first lien on a pool of mortgages. Mortgage pay-through securities
exhibit characteristics of both pass-through and mortgage-backed bonds. The
mortgage pass-through securities issued by non-governmental entities such as
banks, mortgage lenders or other financial institutions in which the Portfolio
may invest include private label mortgage pass-through securities and whole
loans. Mortgage-backed securities also include other debt obligations secured by
mortgages on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
Portfolio may invest in them if Bankers Trust determines they are consistent
with the Portfolio's investment objective and policies.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are mortgage-backed bonds
that separate mortgage pools into different classes, called tranches. Tranches
pay different rates of interest and can mature in a few months, or in as long as
20 years. Issued by the Federal Home Loan Mortgage Corporation (Freddie Mac) and
private issuers, CMOs are usually backed by government-guaranteed or other top
grade mortgages and have AAA ratings. In return for a lower yield, CMOs provide
investors with increased security throughout the life of their investment
compared to purchasing a whole mortgage-backed security. Even so, if mortgage
rates drop sharply, causing a flood of refinancings, prepayment rates will soar
and CMO tranches will be repaid before their expected maturity.
REMICs are pass-through vehicles created under the tax reform act of 1986 to
issue multiclass mortgage-backed securities. REMICs may be organized as
corporations, partnerships or trusts. Interests in REMICs may be senior or
junior, regular (debt instruments) or residual (equity interests). CMOs normally
have AAA bond ratings, whereas REMICs represent a range of risk levels.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein but include assets such as motor vehicle
installment sale contracts, other installment sale contracts, home equity loans,
leases of various types of real and personal property, and receivables from
revolving credit (credit card) agreements. Such assets are securitized through
the use of trusts or special purpose corporations. Payments or distributions of
principal and interest on asset-backed securities may be guaranteed up to
certain amounts and for a certain time period by a letter of credit or a pool
insurance policy issued by a financial institution unaffiliated with the issuer,
or other credit enhancements may be present.
The yield characteristics of the mortgage- and asset-backed securities in
which the Portfolio may invest differ from those of traditional debt securities.
Among the major differences are that interest and principal payments are made
more frequently on mortgage- and asset-backed securities (usually monthly) and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the
Portfolio purchases these securities at a premium, a prepayment rate that is
faster than expected will reduce their yield, while a prepayment rate that is
slower than expected will have the opposite effect of increasing yield.
Conversely, if the Portfolio purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, their yield. Amounts available for reinvestment by the Portfolio
are likely to be greater during a period of declining interest rates and, as a
result, are likely to be reinvested at lower interest rates than during a period
of rising interest rates.
Unlike ordinary Fixed Income Securities, which generally pay a fixed rate of
interest and return principal upon maturity, mortgage-backed securities repay
both interest income and principal as part of their periodic payments. Because
the mortgages underlying mortgage-backed certificates can be prepaid at any time
by homeowners or corporate borrowers, mortgage-backed securities give rise to
certain unique "pre-payment" risks. Prepayment risk or call risk is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Portfolio to invest the proceeds at generally lower interest rates.
In general, the prepayment rate for mortgage-backed securities decreases as
interest rates rise and increases as interest rates fall. However, rising
interest rates will tend to decrease the value of these securities. In addition,
an increase in interest rates may affect the volatility of these securities by
effectively changing a security that was considered a short-term security at the
time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities.
The market for privately issued mortgage- and asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. CMO classes may be specially structured in a manner that provides
any of a wide variety of investment characteristics, such as yield, effective
maturity and interest rate sensitivity. As market conditions change, however,
and particularly during periods of rapid or unanticipated changes in market
interest rates, the attractiveness of the CMO classes and the ability of the
structure to provide the anticipated investment characteristics may be
significantly reduced. These changes can result in volatility in the market
value, and in some instances reduced liquidity, of the CMO class.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same type of security interest in the related collateral. Credit card
receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. There is the risk in connection
with automobile receivables that recoveries on repossessed collateral may not,
in some cases, be available to support payments on those securities.
ZERO-COUPON SECURITIES. The Portfolio may invest in certain zero coupon
securities that are "stripped" U.S. Treasury notes and bonds. Zero Coupon
Securities including CATS, TIGRs and TRs, are the separate income or principal
components of a debt instrument. Zero coupon securities usually trade at a
substantial discount from their face or par value. Zero coupon securities are
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities that make current
distributions of interest in cash. Zero coupon securities involve risks that are
similar to those of other debt securities, although they may be more volatile,
and the value of certain zero coupon securities moves in the same direction as
interest rates. Zero coupon bonds do not make regular interest payments.
WRAPPER AGREEMENTS. Wrapper Agreements are structured with a number of
different features. Wrapper Agreements purchased by the Portfolio are of three
basic types: (1) non-participating, (2) participating and (3) "hybrid." In
addition, the Wrapper Agreements will either be of fixed-maturity or open-end
maturity ("evergreen"). The Portfolio enters into particular types of Wrapper
Agreements depending upon their respective cost to the Portfolio and the Wrapper
Provider's creditworthiness, as well as upon other factors. Under most
circumstances, it is anticipated that the Portfolio will enter into
participating Wrapper Agreements of open-end maturity and hybrid Wrapper
Agreements.
Under a NON-PARTICIPATING WRAPPER AGREEMENT, the Wrapper Provider becomes
obligated to make a payment to the Portfolio whenever the Portfolio sells
Covered Assets at a price below Book Value to meet withdrawals of a type covered
by the Wrapper Agreement (a "Benefit Event"). Conversely, the Portfolio becomes
obligated to make a payment to the Wrapper Provider whenever the Portfolio sells
Covered Assets at a price above their Book Value in response to a Benefit Event.
In neither case is the Crediting Rate adjusted at the time of the Benefit Event.
Accordingly, under this type of Wrapper Agreement, while the Portfolio is
protected against decreases in the market value of the Covered Assets below Book
Value, it does not realize increases in the market value of the Covered Assets
above Book Value; those increases are realized by the Wrapper Providers.
Under a PARTICIPATING WRAPPER AGREEMENT, the obligation of the Wrapper
Provider or the Portfolio to make payments to each other typically does not
arise until all of the Covered Assets have been liquidated. Instead of payments
being made on the occurrence of each Benefit Event, these obligations are a
factor in the periodic adjustment of the Crediting Rate.
Under a HYBRID WRAPPER AGREEMENT, the obligation of the Wrapper Provider or
the Portfolio to make payments does not arise until withdrawals exceed a
specified percentage of the Covered Assets, after which time payment covering
the difference between market value and Book Value will occur.
A FIXED-MATURITY WRAPPER AGREEMENT terminates at a specified date, at which
time settlement of any difference between Book Value and market value of the
Covered Assets occurs. A fixed-maturity Wrapper Agreement tends to ensure that
the Covered Assets provide a relatively fixed rate of return over a specified
period of time through bond immunization, which targets the duration of the
Covered Assets to the remaining life of the Wrapper Agreement.
An EVERGREEN WRAPPER AGREEMENT has no fixed maturity date on which payment
must be made, and the rate of return on the Covered Assets accordingly tends to
vary. Unlike the rate of return under a fixed-maturity Wrapper Agreement, the
rate of return on assets covered by an evergreen Wrapper Agreement tends to more
closely track prevailing market interest rates and thus tends to rise when
interest rates rise and fall when interest rates fall. An evergreen Wrapper
Agreement may be converted into a fixed-maturity Wrapper Agreement that will
mature in the number of years equal to the duration of the Covered Assets.
Wrapper Providers are banks, insurance companies and other financial
institutions. The number of Wrapper Providers has been increasing in recent
years. As of December 1999, there were approximately 15 Wrapper Providers rated
in one of the top two long-term rating categories by Moody's, S&P or another
NRSRO. The cost of Wrapper Agreements is typically 0.10% to 0.25% per dollar of
Covered Assets per annum.
In the event of the default of a Wrapper Provider, the Portfolio could
potentially lose the Book Value protections provided by the Wrapper Agreements
with that Wrapper Provider. However, the impact of such a default on the
Portfolio as a whole may be minimal or non-existent if the market value of the
Covered Assets thereunder is greater than their Book Value at the time of the
default, because the Wrapper Provider would have no obligation to make payments
to the Portfolio under those circumstances. In addition, the Portfolio may be
able to obtain another Wrapper Agreement from another Wrapper Provider to
provide Book Value protections with respect to those Covered Assets. The cost of
the replacement Wrapper Agreement might be higher than the initial Wrapper
Agreement due to market conditions or if the market value (plus accrued interest
on the underlying securities) of those Covered Assets is less than their Book
Value at the time of entering into the replacement agreement. Such cost would
also be in addition to any premiums previously paid to the defaulting Wrapper
Provider. If the Portfolio were unable to obtain a replacement Wrapper
Agreement, participants redeeming Shares might experience losses if the market
value of the Portfolio's assets no longer covered by the Wrapper Agreement is
below Book Value. The combination of the default of a Wrapper Provider and an
inability to obtain a replacement agreement could render the Portfolio and the
Fund unable to achieve their investment objective of seeking to maintain a
stable value per Share.
With respect to payments made under the Wrapper Agreements between the
Portfolio and the Wrapper Provider, some Wrapper Agreements provide that
payments may be due upon disposition of the Covered Assets, while others provide
for payment only upon the total liquidation of the Covered Assets or upon
termination of the Wrapper Agreement. In none of these cases, however, would the
terms of the Wrapper Agreements specify which Portfolio Securities are to be
disposed of or liquidated. Moreover, because it is anticipated that each Wrapper
Agreement will cover all Covered Assets up to a specified dollar amount, if more
than one Wrapper Provider becomes obligated to pay to the Portfolio the
difference between Book Value and market value (plus accrued interest on the
underlying securities), each Wrapper Provider will pay a pro-rata amount in
proportion to the maximum dollar amount of coverage provided. Thus, the
Portfolio will not have the option of choosing which Wrapper Agreement to draw
upon in any such payment situation. Under the terms of most Wrapper Agreements,
the Wrapper Provider will have the right to terminate the Wrapper Agreement in
the event that material changes are made to the Portfolio's investment
objectives or limitations or to the nature of the Portfolio's operations. In
such event, the Portfolio may be obligated to pay the Wrapper Provider
termination fees equal in amount to the premiums that would have been due had
the Wrapper Agreement continued through the predetermined period. The Portfolio
will have the right to terminate a Wrapper Agreement for any reason. Such right,
however, may also be subject to the payment of termination fees. In the event of
termination of a Wrapper Agreement or conversion of an evergreen Wrapper
Agreement to a fixed maturity, some Wrapper Agreements may require that the
duration of some portion of the Fund's portfolio securities be reduced to
correspond to the fixed maturity or termination date and that such securities
maintain a higher credit rating than is normally required, either of which
requirements might adversely affect the return of the Portfolio and the Fund.
RISKS OF WRAPPER AGREEMENTS. Each Wrapper Agreement obligates the Wrapper
Provider to maintain the "Book Value" of a portion of the Portfolio's assets
("Covered Assets") up to a specified maximum dollar amount, upon the occurrence
of certain specified events. The Book Value of the Covered Assets is their
purchase price (i) plus interest on the Covered Assets at a rate specified in
the Wrapper Agreement ("Crediting Rate"), and (ii) less an adjustment to reflect
any defaulted securities. The Crediting Rate used in computing Book Value is
calculated by a formula specified in the Wrapper Agreement and is adjusted
periodically. In the case of Wrapper Agreements purchased by the Portfolio, the
Crediting Rate is the actual interest earned on the Covered Assets, or an
index-based approximation thereof, plus or minus an adjustment for an amount
receivable from or payable to the Wrapper Provider based on fluctuations in the
market value of the Covered Assets. As a result, while the Crediting Rate will
generally reflect movements in the market rates of interest, it may at any time
be more or less than these rates or the actual interest income earned on the
Covered Assets. The Crediting Rate may also be impacted by defaulted securities
and by increases and decreases of the amount of Covered Assets as a result of
contributions and withdrawals tied to the sale and redemption of Shares.
Furthermore, the premiums due Wrapper Providers in connection with the
Portfolio's investments in Wrapper Agreements are offset against interest earned
and thus reduce the Crediting Rate. These premiums are generally paid quarterly.
In no event will the Crediting Rate fall below zero percent under the Wrapper
Agreements entered into by the Portfolio.
Under the terms of a typical Wrapper Agreement, if the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value at the time the Covered Assets are liquidated in order to
provide proceeds for withdrawals of Portfolio interests resulting from
redemptions of Shares by Plan participants, the Wrapper Provider becomes
obligated to pay to the Portfolio the difference. Conversely, the Portfolio
becomes obligated to make a payment to the Wrapper Provider if it is necessary
for the Portfolio to liquidate Covered Assets at a price above their Book Value
in order to make withdrawal payments. (Withdrawals generally will arise when the
Fund must pay shareholders who redeem their Shares.) Because it is anticipated
that each Wrapper Agreement will cover all Covered Assets up to a specified
dollar amount, if more than one Wrapper Provider becomes obligated to pay to the
Portfolio the difference between Book Value and market value (plus accrued
interest on the underlying securities), each Wrapper Provider will be obligated
to pay a pro-rata amount in proportion to the maximum dollar amount of coverage
provided. Thus, the Portfolio will not have the option of choosing which Wrapper
Agreement to draw upon in any such payment situation.
The terms of the Wrapper Agreements vary concerning when these payments must
actually be made between the Portfolio and the Wrapper Provider. In some cases,
payments may be due upon disposition of the Covered Assets; other Wrapper
Agreements provide for settlement only upon termination of the Wrapper Agreement
or total liquidation of the Covered Assets.
The Fund expects that the use of Wrapper Agreements by the Portfolio will
under most circumstances permit the Fund to maintain a constant NAV per Share
and to pay dividends that will generally reflect over time both the interest
income of, and market gains and losses on, the Covered Assets held by the
Portfolio less the expenses of the Fund and the Portfolio. However, there can be
no guarantee that the Fund will maintain a constant NAV per Share or that any
Fund shareholder or Plan participant will realize the same investment return as
might be realized by investing directly in the Portfolio assets other than the
Wrapper Agreements. For example, a default by the issuer of a Portfolio Security
or a Wrapper Provider on its obligations might result in a decrease in the value
of the Portfolio assets and, consequently, the Shares. The Wrapper Agreements
generally do not protect the Portfolio from loss if an issuer of Portfolio
Securities defaults on payments of interest or principal. Additionally, a Fund
shareholder may realize more or less than the actual investment return on the
Portfolio Securities depending upon the timing of the shareholder's purchases
and redemption of Shares, as well as those of other shareholders. Furthermore,
there can be no assurance that the Portfolio will be able at all times to obtain
Wrapper Agreements. Although it is the current intention of the Portfolio to
obtain such agreements covering all of its assets (with the exceptions noted),
the Portfolio may elect not to cover some or all of its assets with Wrapper
Agreements should Wrapper Agreements become unavailable or should other
conditions such as cost, in Bankers Trust's sole discretion, render their
purchase inadvisable.
If, in the event of a default of a Wrapper Provider, the Portfolio were
unable to obtain a replacement Wrapper Agreement, participants redeeming Shares
might experience losses if the market value of the Portfolio's assets no longer
covered by the Wrapper Agreement is below Book Value. The combination of the
default of a Wrapper Provider and an inability to obtain a replacement agreement
could render the Portfolio and the Fund unable to achieve their investment
objective of maintaining a stable NAV per Share. If the Board of Trustees of the
Portfolio Trust (the "Portfolio Trust Board") determines that a Wrapper Provider
is unable to make payments when due, that Board may assign a fair value to the
Wrapper Agreement that is less than the difference between the Book Value and
the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
Some Wrapper Agreements require that the Portfolio maintain a specified
percentage of its total assets in short-term investments ("Liquidity Reserve").
These short-term investments must be used for the payment of withdrawals from
the Portfolio and Portfolio expenses. To the extent the Liquidity Reserve falls
below the specified percentage of total assets, the Portfolio is obligated to
direct all net cash flow to the replenishment of the Liquidity Reserve. The
obligation to maintain a Liquidity Reserve may result in a lower return for the
Portfolio and the Fund than if these funds were invested in longer-term Fixed
Income Securities. The Liquidity Reserve required by all Wrapper Agreements is
not expected to exceed 20% of the Portfolio's total assets.
Wrapper Agreements also require that the Covered Assets have a specified
duration or maturity, consist of specified types of securities or be of a
specified investment quality. The Portfolio will purchase Wrapper Agreements
whose criteria in this regard are consistent with the Portfolio's (and the
Fund's) investment objective and policies as described in this Prospectus.
Wrapper Agreements may also require the disposition of securities whose ratings
are downgraded below a certain level. This may limit the Portfolio's ability to
hold such downgraded securities. For a description of Wrapper Provider ratings,
see the Appendix.
ILLIQUID SECURITIES. Mutual funds do not typically hold a significant amount
of illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities, and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register restricted securities in order to dispose of
them, resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Rule 144A Securities are securities
that are not registered for sale under the federal securities laws but can be
resold to institutions pursuant to Rule 144A under the Securities Act of 1933.
Institutional investors depend on an efficient institutional market in which the
unregistered security can be readily resold or on an issuer's ability to honor a
demand for repayment. The fact that there are contractual or legal restrictions
on resale of such investments to the general public or to certain institutions
may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A
under the 1933 Act, which allows a broader institutional trading market for
securities otherwise subject to restriction on their resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. The Adviser anticipates that the market for certain restricted
securities such as institutional commercial paper will expand further as a
result of this rule and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc.
The Adviser will monitor the liquidity of Rule 144A securities held by the
Portfolio under the supervision of the Portfolio Trust Board. In reaching
liquidity decisions, the Adviser will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers or sellers of the security;
(3) dealer undertakings to make a market in the security; and (4) the nature of
the security and of the marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer).
Provided that a dealer or institutional trading market in such securities
exists, these restricted securities are treated as exempt from the Portfolio's
15% limit on illiquid securities. Under the supervision of the Portfolio Trust
Board, Bankers Trust determines the liquidity of restricted securities; and
through reports from Bankers Trust, the Portfolio Trust Board monitors trading
activity in restricted securities. If institutional trading in restricted
securities were to decline, the liquidity of the Portfolio could be adversely
affected.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities can take place a month or more after the date of the
purchase commitment. The purchase price and the interest rate payable, if any,
on the securities are fixed on the purchase commitment date or at the time the
settlement date is fixed. The value of such securities is subject to market
fluctuation, and no interest accrues to the Portfolio until settlement takes
place. At the time the Portfolio makes the commitment to purchase securities on
a when-issued or delayed delivery basis, it will record the transaction, reflect
the value each day of such securities in determining its NAV and, if applicable,
calculate the maturity for the purposes of average maturity from that date. At
the time of settlement, a when-issued security may be valued at less than the
purchase price. To facilitate such acquisitions, the Portfolio will maintain
with its custodian (Bankers Trust) a segregated account with liquid assets,
consisting of cash, U.S. government securities or other appropriate securities,
in an amount at least equal to such commitments. On delivery dates for such
transactions, the Portfolio will meet its obligations from maturities or sales
of the securities held in the segregated account and/or from cash flow. If the
Portfolio chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, realize a gain or loss due to market fluctuation. It is
the current policy of the Portfolio not to enter into when-issued commitments
exceeding in the aggregate 15% of the market value of its total assets, less
liabilities other than the obligations created by when-issued commitments.
U.S. GOVERNMENT OBLIGATIONS. The Portfolio may invest in obligations issued
or guaranteed by U.S. government agencies or instrumentalities. U.S. government
securities are high-quality debt securities issued or guaranteed by the U.S.
Treasury or by an agency or instrumentality of the U.S. government. These
obligations may or may not be backed by the "full faith and credit" of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Portfolio must look principally to the federal agency
issuing or guaranteeing the obligation for ultimate repayment and may not be
able to assert a claim against the United States itself in the event the agency
or instrumentality does not meet its commitments. Securities in which the
Portfolio may invest that are not backed by the full faith and credit of the
United States include obligations of the Tennessee Valley Authority, the Federal
Home Loan Mortgage Corporation and the U.S. Postal Service, each of which has
the right to borrow from the U.S. Treasury to meet its obligations, and
obligations of the Federal Farm Credit System and the Federal Home Loan Banks,
both of whose obligations may be satisfied only by the individual credit of the
issuing agency. Securities that are backed by the full faith and credit of the
United States include obligations of the Government National Mortgage
Association (the "GNMA"), the Farmers Home Administration and the Export-Import
Bank.
LOWER-RATED DEBT SECURITIES ("JUNK BONDS"). The Portfolio may invest in debt
securities rated in the fifth and sixth long-term rating categories by S&P,
Moody's and Duff & Phelps Credit Rating Company, or comparably rated by another
NRSRO, or if not rated by a NRSRO, of comparable quality as determined by
Bankers Trust in its sole discretion. While the market for high yield corporate
debt securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active
than that for higher rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last sale information is available. Adverse publicity and
changing investor perception may affect the availability of outside pricing
services to value lower-rated debt securities and the Portfolio's ability to
dispose of these securities.
Since the risk of default is higher for lower-rated debt securities, Bankers
Trust's research and credit analysis are an especially important part of
managing securities of this type held by the Portfolio. In considering
investments for the Portfolio, Bankers Trust will attempt to identify those
issuers of high yielding debt securities whose financial conditions are adequate
to meet future obligations, have improved or are expected to improve in the
future. Bankers Trust's analysis focuses on relative values based on such
factors as interest on dividend coverage, asset coverage, earnings prospects and
the experience and managerial strength of the issuer.
The Portfolio may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interest of security holders if it determines this to be in the
interest of the Portfolio.
HEDGING STRATEGIES. The Portfolio may use certain strategies designed to
adjust the overall risk of its investment portfolio. These "hedging" strategies
involve derivative contracts, including U.S. Treasury and Eurodollar futures
contracts and exchange-traded put and call options on such futures contracts.
New financial products and risk management techniques continue to be developed
and may be used if consistent with the Portfolio's investment objective and
policies. Among other purposes, these hedging strategies may be used to
effectively maintain a desired portfolio duration or to protect against market
risk should the Portfolio change its investments among different types of Fixed
Income Securities. In this respect, these hedging strategies are designed for
different purposes than the investments in Wrapper Agreements.
The Portfolio might not use any hedging strategies, and there can be no
assurance that any strategy used will succeed. If the Adviser is incorrect in
its judgment on market values, interest rates or other economic factors in using
a hedging strategy, the Portfolio may have lower net income and a net loss on
the investment. Each of these strategies involves certain risks, which include:
* the fact that the skills needed to use hedging instruments are different from
those needed to select securities for the Portfolio;
* the possibility of imperfect correlation, or even no correlation, between the
price movements of hedging instruments and price movements of the securities
or currencies being hedged;
* possible constraints placed on the Portfolio's ability to purchase or sell
portfolio investments at advantageous times due to the need for the Portfolio
to maintain "cover" or to segregate securities; and
* the possibility that the Portfolio will be unable to close out or liquidate
its hedged position.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- GENERAL. The successful
use of these instruments draws upon the Adviser's skill and experience with
respect to such instruments and usually depends on its ability to forecast
interest rate movements correctly. If interest rates move in an unexpected
manner, the Portfolio may not achieve the anticipated benefits of futures
contracts or options thereon or may realize losses and thus will be in a worse
position than if such strategies had not been used. In addition, the correlation
between movements in the price of futures contracts or options thereon and
movements in the price of the securities hedged or used for cover will not be
perfect and could produce unanticipated losses.
FUTURES CONTRACTS. The Portfolio may enter into contracts for the purchase or
sale for future delivery of fixed-income securities or contracts based on
financial indices, including any index of U.S. government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges that have been designated "contracts markets" by the
Commodity Futures Trading Commission ("CFTC") and must be executed through a
futures commission merchant, or brokerage firm, that is a member of the relevant
contract market. Futures contracts trade on a number of exchange markets, and,
through their clearing corporations, the exchanges guarantee performance of the
contracts as between the clearing members of the exchange. The Portfolio may
enter into futures contracts based on debt securities that are backed by the
full faith and credit of the U.S. government, such as long-term U.S. Treasury
bonds, U.S. Treasury notes, GNMA modified pass-through mortgage-backed
securities and three-month U.S. Treasury bills. The Portfolio may also enter
into futures contracts that are based on bonds issued by entities other than the
U.S. government.
At the same time a futures contract is purchased or sold, the Portfolio must
allocate cash or securities as a deposit payment. Daily thereafter, the futures
contract is valued and "variation margin" may be required (that is, the
Portfolio may have to provide or may receive cash that reflects any decline or
increase in the contract's value).
At the time of delivery of securities pursuant to a futures contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the termination date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearinghouse associated with the exchange on which the contracts are traded,
the Portfolio will incur brokerage fees when it purchases or sells futures
contracts.
The purpose of the Portfolio's acquisition or sale of a futures contract is
to attempt to protect the Portfolio from fluctuations in interest rates without
actually buying or selling fixed-income securities. For example, if interest
rates were expected to increase (which thus would cause the prices of debt
securities to decline), the Portfolio might enter into futures contracts for the
sale of debt securities. Such a sale would have much the same effect as selling
an equivalent value of the debt securities owned by the Portfolio. If interest
rates did increase, the value of the debt securities held by the Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the Portfolio's NAV from
declining as much as it otherwise would have. The Portfolio could accomplish
similar results by selling debt securities and investing in bonds with short
maturities when interest rates are expected to increase. However, since the
futures market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive position
without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), futures contracts for the acquisition
of debt securities may be purchased to attempt to hedge against anticipated
purchases of debt securities at higher prices. Since the fluctuations in the
value of futures contracts should be similar to those of the underlying debt
securities, the Portfolio could take advantage of the anticipated rise in the
value of debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Portfolio could then buy debt securities on the cash market. To the extent the
Portfolio enters into futures contracts for this purpose, the assets in the
segregated asset account maintained to cover the Portfolio's obligations with
respect to such futures contracts will consist of cash, cash equivalents or high
quality liquid debt securities from its portfolio in an amount equal to the
difference between the fluctuating market value of such futures contracts and
the aggregate value of the initial and variation margin payments made by the
Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial and variation
margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by Bankers Trust may still not
result in a successful transaction.
In addition, futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Portfolio, if its investment
judgment about the general direction of interest rates is incorrect, the
Portfolio's overall performance would be poorer than if it had not entered into
any such contract. For example, if the Portfolio has hedged against the
possibility of an increase in interest rates that would adversely affect the
price of debt securities held in its portfolio and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities that it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell debt securities from its
portfolio to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices that reflect the rising
market. The Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
OPTIONS ON FUTURES CONTRACTS. The Portfolio may purchase and write (sell)
options on futures contracts for hedging purposes. The purchase of a call option
on a futures contract is similar in some respects to the purchase of a call
option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities. As with
the purchase of futures contracts, when the Portfolio is not fully invested it
may purchase a call option on a futures contract to hedge against a market
advance due to declining interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security that is deliverable upon exercise
of the futures contract. If the futures price at expiration of the option is
below the price specified in the option ("exercise price"), the Portfolio will
retain the full amount of the net premium (the premium received for writing the
option less any commission), which will provide a partial hedge against any
decline that may have occurred in its portfolio holdings. The writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the security that is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than the
exercise price, the Portfolio will retain the full amount of the option net
premium, which will provide a partial hedge against any increase in the price of
securities that the Portfolio intends to purchase. If a put or call option the
Portfolio has written is exercised, the Portfolio may incur a loss that will be
reduced by the amount of the net premium it receives. Depending on the degree of
correlation between changes in the value of its portfolio securities and changes
in the value of its futures positions, such losses from existing options on
futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of put options on portfolio securities. For example,
the Portfolio may purchase a put option on a futures contract to hedge its
portfolio against the risk of rising interest rates. The amount of risk the
Portfolio assumes when it purchases an option on a futures contract is the
premium paid for the option plus related transaction costs. In addition to the
correlation risks discussed above, the purchase of an option also entails the
risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
The Portfolio Trust Board has adopted a restriction that the Portfolio will
not enter into any futures contract or option on a futures contract if
immediately thereafter the amount of margin deposits on all the futures
contracts held by the Portfolio and premiums paid on outstanding options on its
futures contracts (other than those entered into for BONA FIDE hedging purposes)
would exceed 5% of the market value of the Portfolio's total assets.
OPTIONS ON SECURITIES. The Portfolio may write (sell) covered call and put
options on its portfolio securities ("covered options") to a limited extent in
an attempt to increase income. However, the Portfolio may forgo the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options it writes. A call option
written by a Portfolio is "covered" if the Portfolio owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call option on the same security and in the
same principal amount as the written call option where the exercise price of the
call option so held (a) is equal to or less than the exercise price of the
written call option or (b) is greater than the exercise price of the written
call option if the difference is maintained by the Portfolio in cash, U.S.
government securities and other high quality liquid securities in a segregated
account with its custodian.
When the Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the exercise price by
exercising the option at any time during the option period. If the option
expires unexercised, the Portfolio will realize income in an amount equal to the
premium received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the underlying
security to the option holder at the exercise price. By writing a covered call
option, the Portfolio forgoes, in exchange for the net premium, the opportunity
to profit during the option period from an increase in the market value of the
underlying security above the exercise price.
When the Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
exercise price at any time during the option period. If the option expires
unexercised, the Portfolio will realize income in the amount of the net premium
received for writing the option. If the put option is exercised, a decision over
which the Portfolio has no control, the Portfolio must purchase the underlying
security from the option holder at the exercise price. By writing a covered put
option, the Portfolio, in exchange for the net premium, accepts the risk of a
decline in the market value of the underlying security below the exercise price.
The Portfolio will only write put options involving securities for which a
determination is made at the time the option is written that the Portfolio
wishes to acquire the securities at the exercise price.
The Portfolio may terminate its obligation as the writer of a call or put
option by purchasing an option with the same exercise price and expiration date
as the option previously written. This transaction is called a "closing purchase
transaction." The Portfolio will realize a profit or loss on a closing purchase
transaction if the amount paid to purchase the option is less or more, as the
case may be, than the amount received from the sale thereof. To close out a
position as a purchaser of an option, the Portfolio may enter into a "closing
sale transaction," which involves liquidating the Portfolio's position by
selling the option previously purchased. Where the Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When the Portfolio writes an option, an amount equal to the net premium
received is included in the liability section of its Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked to market to reflect the current market value of the option.
The current market value of a traded option is the last sale price or, in the
absence of a sale, the mean between the closing bid and asked prices. If an
option expires or if the Portfolio enters into a closing purchase transaction,
the Portfolio will realize a gain (or loss if the cost of the closing purchase
transaction exceeds the net premium received when the option was sold), and the
deferred credit related to such option will be eliminated. If a call option is
exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be segregated on
the books of the custodian for the Portfolio.
The Portfolio may purchase call and put options on any securities in which it
may invest. The Portfolio would normally purchase a call option in anticipation
of an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. The Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
The Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell a security, which may or may not be held in the Portfolio's holdings, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's holdings. Put options also may be purchased by the Portfolio for the
purpose of benefiting from a decline in the price of securities that the
Portfolio does not own. The Portfolio would ordinarily recognize a gain if the
value of the securities decreased below the exercise price sufficiently to cover
the premium and would recognize a loss if the value of the securities remained
at or above the exercise price. Gains and losses on the purchase of protective
put options would tend to be offset by countervailing changes in the value of
underlying portfolio securities.
The Portfolio has adopted certain non-fundamental policies concerning option
transactions that are discussed below.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded if the option markets close
before the markets for the underlying securities, significant price and rate
movements can take place in the underlying securities markets that will not be
reflected in the option markets. It is impossible to predict the volume of
trading that may exist in such options, and there can be no assurance that
viable exchange markets will develop or continue.
The Portfolio may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. At present, approximately ten
broker-dealers, including several of the largest primary dealers in U.S.
government securities, make these markets. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. To reduce this risk, the
Portfolio will purchase such options only from broker-dealers who are primary
U.S. government securities dealers recognized by the Federal Reserve Bank of New
York and who agree to (and are expected to be capable of) entering into closing
transactions, although there can be no guarantee that any such option will be
liquidated at a favorable price prior to expiration. Bankers Trust will monitor
the creditworthiness of dealers with whom the Portfolio enters into such options
transactions under the general supervision of the Portfolio Board.
GLOBAL ASSET ALLOCATION STRATEGY ("GAA STRATEGY"). In connection with the GAA
Strategy and in addition to the securities described above, the Portfolio may
invest in indexed securities, futures contracts on securities indices,
securities representing securities of foreign issuers (e.g. ADRs, GDRs and
EDRs), options on stocks, options on futures contracts, foreign currency
exchange transactions and options on foreign currencies. These are discussed
below, to the extent not already described above.
INDEXED SECURITIES. The indexed securities in which the Portfolio may invest
include debt securities whose value at maturity is determined by reference to
the relative prices of various currencies or to the price of a stock index. The
value of such securities depends on the price of foreign currencies, securities
indices or other financial values or statistics. These securities may be
positively or negatively indexed; that is, their value may increase or decrease
if the underlying instrument appreciates.
FUTURES CONTRACTS ON SECURITIES INDICES. Futures contracts on securities
indices provide for the making and acceptance of a cash settlement based upon
changes in the value of an index of securities, and will be entered into by the
Portfolio to hedge against anticipated future change in general market prices
which otherwise might either adversely affect the value of securities held by
the Portfolio or adversely affect the prices of securities which are intended to
be purchased at a later date for the Portfolio, or as an efficient means of
managing allocations between asset classes. A futures contract may also be
entered into to close out or offset an existing futures position. The risks
attendant to futures contracts on securities indices are similar to those of
futures contracts, discussed above.
SECURITIES REPRESENTING SECURITIES OF FOREIGN ISSUERS. The Portfolio's
investments in the securities of foreign issuers may be made directly or in the
form of American Depositary Receipts ("ADRs"), Global Depositary Receipts
("GDRs"), European Depositary Receipts ("EDRs") or other similar securities
representing securities of foreign issuers. These securities may not necessarily
be denominated in the same currency as the securities they represent, and while
designed for use as alternatives to the purchase of the underlying securities in
their national markets and currencies, are subject to the same risks as the
foreign securities to which they relate.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Portfolio from time to time may
enter into foreign currency exchange transactions to convert to and from
different foreign currencies and to convert foreign currencies to and from the
U.S. dollar, either on a spot (i.e., cash) basis at the spot rate prevailing in
the foreign currency exchange market, or through forward contracts to purchase
or sell foreign currencies. A forward foreign currency exchange contract
obligates the Portfolio to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward foreign currency exchange contract generally has no deposit
requirement and is traded at a net price without commission. Neither spot
transactions nor forward foreign currency exchange contracts eliminate
fluctuations in the prices of the Portfolio's securities or in foreign exchange
rates, or prevent loss if the prices of these securities should decline.
The Portfolio may enter into foreign currency hedging transactions in an
attempt to protect against changes in foreign currency exchange rates between
the trade and settlement dates of specific securities transactions or changes in
foreign currency exchange rates that would adversely affect a portfolio position
or an anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into Bankers Trust's long term investment
decisions, the Portfolio will not routinely enter into foreign currency hedging
transactions with respect to security transactions; however, Bankers Trust
believes that it is important to have the flexibility to enter into foreign
currency hedging transactions when it determines that the transactions would be
in the Portfolio's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
contract amounts and the value of the securities involved will not generally be
possible because the future value of such securities in foreign currencies will
change as a consequence of market movements in the value of such securities
between the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and the
successful execution of a hedging strategy is highly uncertain.
OPTIONS ON FOREIGN CURRENCIES. The Portfolio may write covered put and call
options and purchase put and call options on foreign currencies for the purpose
of protecting against declines in the dollar value of portfolio securities and
against increases in the dollar cost of securities to be acquired. The Portfolio
may use options on currency to cross hedge, which involves writing or purchasing
options on one currency to hedge against changes in exchange rates for a
different, but related currency. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial hedge up
to the amount of the premium received, and the Portfolio could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange
rate movements adverse to the Portfolio's position, it may forfeit the entire
amount of the premium plus related transaction costs. In addition, the Portfolio
may purchase call options on currency when the Adviser anticipates that the
currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time. If the
Portfolio is unable to effect a closing purchase transaction with respect to
covered options it has written, the Portfolio will not be able to sell the
underlying currency or dispose of assets held in a segregated account until the
options expire or are exercised. Similarly, if the Portfolio is unable to effect
a closing sale transaction with respect to options it has purchased, it would
have to exercise the options in order to realize any profit and will incur
transaction costs upon the purchase or sale of underlying currency. The
Portfolio pays brokerage commissions or spreads in connection with its options
transactions.
As in the case of forward contracts, certain options on foreign currencies
are traded over the counter and involve liquidity and credit risks which may not
be present in the case of exchange traded currency options. The Portfolio's
ability to terminate over-the-counter ("OTC") options will be more limited than
with exchange traded options. It is also possible that broker dealers
participating in OTC options transactions will not fulfill their obligations.
Until such time as the staff of the SEC changes its position, the Portfolio will
treat purchased OTC options and assets used to cover written OTC options as
illiquid securities. With respect to options written with primary dealers in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount of illiquid securities may be
calculated with reference to the repurchase formula.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Portfolio buys a
security at one price and simultaneously agrees to sell it back to the seller on
a specific date and at a higher price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the underlying security. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS. In a reverse repurchase
agreement, the Portfolio temporarily transfers possession of a portfolio
instrument to another party in return for cash. This could increase the risk of
fluctuation in the Fund's yield or in the market value of its interest in the
Portfolio. In a dollar roll, the Portfolio sells mortgage-backed or other
securities for delivery in the current month and simultaneously contracts to
purchase substantially similar securities on a specified future date. Reverse
repurchase agreements and dollar rolls are forms of borrowing and will be
counted towards the Portfolio's borrowing restrictions. Wrapper Agreements would
cover the cash proceeds of such transactions but not the portfolio instruments
transferred to another party until possession of such instruments is returned to
the Portfolio.
BORROWING. The Portfolio will not borrow money (including through reverse
repurchase agreements or dollar roll transactions) for any purpose in excess of
5% of its total assets, except that it may borrow for temporary or emergency
purposes up to 1/3 of its total assets. Under the 1940 Act, the Portfolio is
required to maintain continuous asset coverage of 300% with respect to such
borrowings and to sell (within three days) sufficient portfolio holdings to
restore such coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidation of the Portfolio's holdings
may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any increase or
decrease in the value of the Portfolio's securities and the Fund's NAV per
Share, and money borrowed by the Portfolio will be subject to interest and other
costs (which may include commitment fees and/or the cost of maintaining minimum
average balances) that may exceed the income received from the securities
purchased with the borrowed funds. It is not the intention of Bankers Trust to
use leverage as a normal practice in the investment of the Portfolio's assets.
There can be no assurance that the use of these portfolio strategies will be
successful.
ASSET COVERAGE. To assure that the Portfolio's use of futures contracts and
related options, as well as when-issued and delayed-delivery securities, are not
used to achieve investment leverage, the Portfolio will cover such transactions,
as required under applicable interpretations of the SEC, either by owning the
underlying securities or by segregating or earmarking liquid securities with the
Portfolio's custodian (Bankers Trust) in an amount at all times equal to or
exceeding the Portfolio's commitment with respect to these instruments or
contracts. The Portfolio will also cover its use of Wrapper Agreements to the
extent required to avoid the creation of a "senior security" (as defined in the
1940 Act) in connection with its use of such agreements.
RATING SERVICES -- The ratings of rating services represent their opinions as to
the quality of the securities that they undertake to rate. It should be
emphasized, however, that ratings are relative and subjective and are not
absolute standards of quality. Although these ratings are an initial criterion
for selection of portfolio investments, the Adviser also makes its own
evaluation of these securities, subject to review by the Portfolio Trust Board.
After purchase by the Portfolio, an obligation may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event would require the Portfolio to eliminate the obligation from its
portfolio, but the Adviser will consider such an event in its determination of
whether the Portfolio should continue to hold the obligation. A description of
the ratings referred to herein and in the Prospectus is set forth in the
Appendix.
INVESTMENT RESTRICTIONS -- The following investment restrictions are
"fundamental policies" of the Fund and the Portfolio and may not be changed
without the approval of a "majority of the outstanding voting securities" of the
Fund or the Portfolio, as the case may be. The phrase "Majority of the
outstanding voting securities" under the 1940 Act, and as used in this SAI and
the Prospectus, means, with respect to the Fund (or the Portfolio), the lesser
of (1) 67% or more of the outstanding voting securities of the Fund (or of the
total beneficial interests of the Portfolio) present at a meeting, if the
holders of more than 50% of the outstanding voting securities of the Fund (or of
the total beneficial interests of the Portfolio) are present or represented by
proxy or (2) more than 50% of the outstanding voting securities of the Fund (or
of the total beneficial interests of the Portfolio). Whenever the Fund is
requested to vote on a fundamental policy of the Portfolio, the Fund will hold a
meeting of its shareholders and will cast its vote as instructed by them. Fund
shareholders who do not vote will not affect the Fund's votes at the Portfolio
meeting. The Fund's votes representing Fund shareholders not voting will be
voted by the Directors of Security Income Fund in the same proportion as the
Fund shareholders who do, in fact, vote.
None of the fundamental and non-fundamental policies described below shall
prevent the Fund from investing all of its assets in an open-end investment
company with substantially the same investment objective. Because the Fund and
the Portfolio have the same fundamental policies and the Fund invests all of its
Assets in the Portfolio, the following discussion (though speaking only of the
Portfolio) applies to the Fund as well.
FUNDAMENTAL RESTRICTIONS. As a matter of fundamental policy, the Portfolio
may not:
1. Borrow money (including through reverse repurchase or dollar roll
transactions) in excess of 5% of the Portfolio's total assets (taken at
cost), except that the Portfolio may borrow for temporary or emergency
purposes up to 1/3 of its net assets. The Portfolio may pledge, mortgage or
hypothecate not more than 1/3 of such assets to secure such borrowings
provided that collateral arrangements with respect to options and futures,
including deposits of initial and variation margin, are not considered a
pledge of assets for purposes of this restriction and except that assets may
be pledged to secure letters of credit solely for the purpose of
participating in a captive insurance company sponsored by the Investment
Company Institute;
2. Underwrite securities issued by other persons except insofar as the
Portfolio may be deemed an underwriter under the 1933 Act in selling a
portfolio security;
3. Make loans to other persons except (a) through the lending of the
Portfolio's portfolio securities and provided that any such loans not exceed
30% of its total assets (taken at market value); (b) through the use of
repurchase agreements or the purchase of short-term obligations; or (c) by
purchasing a portion of an issue of debt securities of types distributed
publicly or privately;
4. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein), interests
in oil, gas or mineral leases, commodities or commodity contracts (except
futures and option contracts) in the ordinary course of business (except
that the Portfolio may hold and sell, for its portfolio, real estate
acquired as a result of the Portfolio's ownership of securities);
5. Concentrate its investments in any particular industry (excluding U.S.
government securities), but if it is deemed appropriate for the achievement
of the Portfolio's investment objective, up to 25% of its total assets may
be invested in any one industry;
6. Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, provided that collateral arrangements
with respect to options and futures contracts, including deposits of initial
and variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction;
7. Purchase, with respect to 75% of the Portfolio's total assets, securities of
any issuer if such purchase at the time thereof would cause the Portfolio to
hold more than 10% of any class of securities of such issuer, for which
purposes all indebtedness of an issuer shall be deemed a single class and
all preferred stock of an issuer shall be deemed a single class, except that
options or futures contracts shall not be subject to this restriction; and
8. Invest, with respect to 75% of the Portfolio's total assets, more than 5% of
its total assets in the securities (excluding U.S. government securities) of
any one issuer.
NON-FUNDAMENTAL RESTRICTIONS. In order to comply with certain statutes and
policies and for other reasons, the Portfolio will not, as a matter of operating
policy (these restrictions may be changed without shareholder approval):
(i) purchase any security or evidence of interest therein on margin, except
that short-term credit necessary for the clearance of purchases and sales
of securities may be obtained and deposits of initial and variation
margin may be made in connection with the purchase, ownership, holding or
sale of futures contracts;
(ii) sell securities it does not own (short sales). (This restriction does not
preclude short sales "against the box" (that is, sales of securities (a)
the Portfolio contemporaneously owns or (b) where the Portfolio has the
right to obtain securities equivalent in kind and amount to those sold).
The Portfolio has no current intention to engage in short selling);
(iii) purchase securities issued by any investment company except to the extent
permitted by the 1940 Act (including any exemptions or exclusions
therefrom), except that this limitation does not apply to securities
received or acquired as dividends, through offers of exchange, or as a
result of reorganization, consolidation or merger; and
(iv) invest more than 15% of the Portfolio's net assets (taken at the greater
of cost or market value) in securities that are illiquid or not readily
marketable (excluding Rule 144A securities deemed by the Portfolio Board
to be liquid).
An investment restriction will not be considered violated if that restriction
is complied with at the time the relevant action is taken, notwithstanding a
later change in the market value of an investment, in net or total assets or in
the change of securities rating of the investment or any other later change.
The Portfolio will comply with the permitted investments and investment
limitations in the securities laws and regulations of all states in which the
Fund, or any other registered investment company investing in the Portfolio, is
registered.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS -- The Adviser is responsible
for decisions to buy and sell securities, futures contracts and options thereon
for the Portfolio, the selection of brokers, dealers and futures commission
merchants to effect transactions and the negotiation of brokerage commissions,
if any. Broker-dealers may receive brokerage commissions on portfolio
transactions, including options, futures contracts and options on futures
transactions and the purchase and sale of underlying securities upon the
exercise of options. Orders may be directed to any broker-dealer or futures
commission merchant, including, to the extent and in the manner permitted by
applicable law, the Adviser or its subsidiaries or affiliates. Purchases and
sales of certain portfolio securities on behalf of the Portfolio are frequently
placed by the Adviser with the issuer or a primary or secondary market-maker for
these securities on a net basis, without any brokerage commission being paid by
the Portfolio. Trading does, however, involve transaction costs. Transactions
with dealers serving as market-makers reflect the spread between the bid and
asked prices. Transaction costs may also include fees paid to third parties for
information as to potential purchasers or sellers of securities. Purchases of
underwritten issues may be made that will include an underwriting fee paid to
the underwriter.
The Adviser seeks to evaluate the overall reasonableness of the brokerage
commissions paid (to the extent applicable) in placing orders for the purchase
and sale of securities for the Portfolio taking into account such factors as
price, commission (negotiable in the case of national securities exchange
transactions), if any, size of order, difficulty of execution and skill required
of the executing broker-dealer through familiarity with commissions charged on
comparable transactions, as well as by comparing commissions paid by the
Portfolio to reported commissions paid by others. The Adviser reviews on a
routine basis commission rates, execution and settlement services performed,
making internal and external comparisons.
For the period December 23, 1998 through September 30, 1999, the Portfolio
paid brokerage commissions in the amount of $180.
The Adviser is authorized, consistent with Section 28(e) of the Securities
Exchange Act of 1934, as amended, when placing portfolio transactions for the
Portfolio with a broker to pay a brokerage commission (to the extent applicable)
in excess of that which another broker might have charged for effecting the same
transaction on account of the receipt of research, market or statistical
information. The term "research, market or statistical information" includes (a)
advice as to (i) the value of securities, (ii) the advisability of investing in,
purchasing or selling securities, and (iii) the availability of securities or
purchasers or sellers of securities and (b) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. Higher commissions may be
paid to firms that provide research services to the extent permitted by law. The
Adviser may use this research information in managing the Portfolio's assets, as
well as the assets of other clients.
Consistent with the policy stated above, the Conduct Rules of the National
Association of Securities Dealers, Inc. and such other policies as the Portfolio
Trust Board may determine, the Adviser may consider sales of shares of the Fund
and of other investment company clients of the Adviser as a factor in the
selection of broker-dealers to execute portfolio transactions. The Adviser will
make such allocations if commissions are comparable to those charged by
nonaffiliated, qualified broker-dealers for similar services.
Except for implementing the policies stated above, there is no intention to
place portfolio transactions with particular brokers or dealers or groups
thereof. In effecting transactions in over-the-counter securities, orders are
placed with the principal market-makers for the security being traded unless,
after exercising care, it appears that more favorable results are available
otherwise.
Although certain research, market or statistical information from brokers and
dealers can be useful to the Portfolio and to the Adviser, it is the opinion of
the Portfolio's management that such information is only supplementary to the
Adviser's own research effort, since the information must still be analyzed,
weighed and reviewed by the Adviser's staff. Such information may be useful to
the Adviser in providing services to clients other than the Portfolio, and not
all such information is used by the Adviser in connection with the Portfolio.
Conversely, such information provided to the Adviser by brokers and dealers
through whom other clients of the Adviser effect securities transactions may be
useful to the Adviser in providing services to the Portfolio.
In certain instances there may be securities that are suitable for the
Portfolio, as well as for one or more of the Adviser's other clients. Investment
decisions for the Portfolio and for the Adviser's other clients are made with a
view to achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more clients are
selling that same security. Some simultaneous transactions are inevitable when
several clients receive investment advice from the same investment adviser,
particularly when the same security is suitable for the investment objectives of
more than one client. When two or more clients are simultaneously engaged in the
purchase or sale of the same security, the securities are allocated between
(among) clients in a manner believed to be equitable to each. It is recognized
that in some cases this system could have a detrimental effect on the price or
volume of the security as far as the Portfolio is concerned. However, it is
believed that the ability of the Portfolio to participate in volume transactions
will produce better executions for the Portfolio.
PERFORMANCE INFORMATION
STANDARD PERFORMANCE INFORMATION -- From time to time, quotations of the Fund's
performance may be included in advertisements, sales literature or shareholder
reports. These performance figures are calculated in the following manner:
YIELD. Yield refers to the income generated by an investment over a given
period of time, expressed as an annual percentage rate. Yields are calculated
according to a standard that is required for all stock and bond mutual funds.
Because this differs from other accounting methods, the quoted yield may not
equal the income actually paid to shareholders.
Per SEC regulations, the yield of the Fund (the "SEC yield") shall be
calculated on any determination date as follows:
2[((a - b)(c * d) + 1)^6 - 1]
where a = current income measured over a 30-day period.
b = Expenses accrued during the same 30-day period.
c = Average daily number of shares outstanding during the same 30-day
period.
d = Maximum offering price per share on the last day of the period.
The "annual effective yield" of the fund is intended to represent one day's
investment income expressed as an annualized yield and compounded annually. It
shall be expressed as a percentage and calculated on each business day as
follows based on the dividend declared for the previous day.
[(1 + previous day's dividend factor)^365 - 1]
----------------------------------------------
NAV per share
Example: If on March 1, the Fund's dividend factor is 0.00174163 and the
Fund's NAV per share is $10, then the Fund's annual effective yield for March 2
equals 6.56%.
The annual effective yield of the Portfolio is used in determining when the
interest rate trigger is active.
Performance information or advertisements may include comparisons of the
Fund's investment results to various unmanaged indices or results of other
mutual funds or investment or savings vehicles. From time to time, the Fund's
ranking may be quoted from various sources, such as Lipper Analytical Services,
Inc., Value Line, Inc. and Morningstar, Inc.
Unlike some bank deposits or other investments that pay a fixed yield for a
stated period of time, the total return of the Shares will vary depending upon
interest rates, the current market value of the securities held by the Portfolio
and the Wrapper Agreements and changes in the expenses of the Shares and the
Portfolio. In addition, during certain periods for which total return may be
provided, the Fund's administrator, Security Management Company, LLC may have
voluntarily agreed to waive portions of its fees, or to reimburse certain
operating expenses of the Fund , on a month-to-month basis. Bankers Trust may
have agreed to do the same thing with respect to the Portfolio. Such waivers
will have the effect of increasing the Fund's net income (and therefore its
yield and total return) during the period such waivers are in effect.
TOTAL RETURN. Total return is the change in value of an investment in the
shares over a given period, assuming reinvestment of any dividends and capital
gain distributions. A cumulative total return reflects actual performance over a
stated period of time. An average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same cumulative total
return if performance had been constant over the entire period. Average annual
total return calculations smooth out variations in performance; they are not the
same as actual year-by-year results. Average annual total returns covering
periods of less than one year assume that performance will remain constant for
the rest of the year.
The Fund's average annual total return is calculated for certain periods by
determining the average annual compounded rates of return over those periods
that would cause an investment of $1,000 (made at the maximum public offering
price with all distributions reinvested) to reach the value of that investment
at the end of the periods. The Fund may also calculate total return figures that
represent aggregate performance over a period or year-by-year performance.
PERFORMANCE RESULTS. Any performance information provided for the Fund should
not be considered as representative of its performance in the future, because
the NAV and public offering price of Shares will vary based not only on the
type, quality and maturities of the securities held by the Portfolio but also on
changes in the current value of such securities and on changes in the expenses
of the Fund and the Portfolio. Total return reflects the performance of both
principal and income.
Unless noted otherwise, the Fund's total return and average annual total
return will reflect deduction of the maximum initial sales load in the case of
Class A shares or the applicable deferred sales charge in the case of Class B
and Class C shares. From time to time the Fund may include performance
information in advertisements and sales literature without deduction of the
sales charge, which, if deducted, would reduce the performance data quoted.
COMPARISON OF FUND PERFORMANCE -- Comparison of the quoted non-standardized
performance of various investments is valid only if performance is calculated in
the same manner. Since there are different methods of calculating performance,
investors should consider the effect of the methods used to calculate
performance when comparing performance of the Fund with performance quoted with
respect to other investment companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, the Fund also may compare these figures to the performance of
other mutual funds tracked by mutual fund rating services or to unmanaged
indices that may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. Evaluations of the Fund's
performance made by independent sources may also be used in advertisements
concerning the Fund. Sources for the Fund's performance information could
include the following: ASIAN WALL STREET JOURNAL, BARRON'S, BUSINESS WEEK,
CHANGING TIMES, THE KIPLINGER MAGAZINE, CONSUMER DIGEST, FINANCIAL TIMES,
FINANCIAL WORLD, FORBES, FORTUNE, GLOBAL INVESTOR, INVESTOR'S DAILY, LIPPER
ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, MONEY, MORNINGSTAR
INC., NEW YORK TIMES, PERSONAL INVESTING NEWS, PERSONAL INVESTOR, SUCCESS, U.S.
NEWS AND WORLD REPORT, VALUELINE, WALL STREET JOURNAL, WEISENBERGER INVESTMENT
COMPANIES SERVICES, WORKING WOMEN and WORTH.
ECONOMIC AND MARKET INFORMATION -- Advertising and sales literature of the Fund
may include discussions of economic, financial and political developments and
their effect on the securities market. Such discussions may take the form of
commentary on these developments by Fund portfolio managers and their views and
analysis on how such developments could affect the Fund. In addition,
advertising and sales literature may quote statistics and give general
information about the mutual fund industry, including the growth of the
industry, from sources such as the Investment Company Institute ("ICI"). For
example, according to the ICI, thirty-seven percent of American households are
pursuing their financial goals through mutual funds. These investors, as well as
businesses and institutions, have entrusted over $3.5 trillion to the more than
6,000 funds available.
VALUATION OF ASSETS; REDEMPTIONS IN KIND
Debt securities (other than short-term debt obligations maturing in 60 days or
less), including listed securities and securities for which price quotations are
available, will normally be valued on the basis of market valuations furnished
by a pricing service. Such market valuations may represent the last quoted price
on the securities' major trading exchange or quotes received from dealers or
market makers in the relevant securities or may be determined through the use of
matrix pricing. In matrix pricing, pricing services may use various pricing
models, involving comparable securities, historic relative price movements,
economic factors and dealer quotations. Over-the-counter securities will
normally be valued at the bid price. Short-term debt obligations and money
market securities maturing in 60 days or less are valued at amortized cost.
Securities for which market quotations are not readily available are valued
by Bankers Trust pursuant to procedures adopted by the Portfolio's Trust Board.
The NAV per Share is calculated once on each Valuation Day as of the
Valuation Time, which is currently 3:00 p.m., Central time, or if the NYSE
closes early, at the time of such early closing. The NAV per Share is computed
by dividing the value of the Fund's assets (I.E., the value of its investment in
the Portfolio and other assets, if any), less all liabilities, by the total
number of its Shares outstanding. The Portfolio's securities and other assets
are valued primarily on the basis of market quotations or, if quotations are not
readily available, by a method that the Portfolio Trust Board believes
accurately reflects fair value.
Pursuant to procedures adopted by the Portfolio Trust Board, the Wrapper
Value generally will be equal to the difference between the Book Value and the
market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets. If the market value (plus accrued interest on the
underlying securities) of the Covered Assets is greater than their Book Value,
the Wrapper Value will be reflected as a liability of the Portfolio in the
amount of the difference, I.E., a negative value, reflecting the potential
liability of the Portfolio to the Wrapper Provider. If the market value (plus
accrued interest on the underlying securities) of the Covered Assets is less
than their Book Value, the Wrapper Value will be reflected as an asset of the
Portfolio in the amount of the difference, I.E., a positive value, reflecting
the potential liability of the Wrapper Provider to the Portfolio. In performing
its fair value determination, the Portfolio Trust Board expects to consider the
creditworthiness and ability of a Wrapper Provider to pay amounts due under the
Wrapper Agreement. If the Portfolio Trust Board determine that a Wrapper
Provider is unable to make such payments, that Board may assign a fair value to
the Wrapper Agreement that is less than the difference between the Book Value
and the market value (plus accrued interest on the underlying securities) of the
applicable Covered Assets and the Portfolio might be unable to maintain NAV
stability.
The problems inherent in making a good faith determination of value are
recognized in the codification effected by SEC Financial Reporting Release No. 1
(formerly Accounting Series Release No. 113) ("FRR 1"), which concludes that
there is "no automatic formula" for calculating the value of restricted
securities. It recommends that the best method simply is to consider all
relevant factors before making any calculation. According to FRR 1, such factors
would include consideration of the--
type of security involved, financial statements, cost at date of purchase,
size of holding, discount from market value of unrestricted securities of
the same class at the time of purchase, special reports prepared by
analysts, information as to any transactions or offers with respect to the
security, existence of merger proposals or tender offers affecting the
security, price and extent of public trading in similar securities of the
issuer or comparable companies, and other relevant matters.
The Adviser will value securities purchased by the Portfolio that are
restricted as to resale or for which current market quotations are not readily
available, including Wrapper Agreements, based upon all relevant factors as
outlined in FRR 1.
The Fund and the Portfolio each reserves the right, if conditions exist that
make cash payments undesirable, or for other reasons, to honor any request for
redemption or withdrawal, respectively, by making payment wholly or partly in
Portfolio Securities, as the same may be chosen by the Adviser in its sole
discretion (a "redemption in kind"). Such securities shall not include Wrapper
Agreements, and shall be valued as they are for purposes of computing the Fund's
or the Portfolio's NAV, as the case may be. If payment is made to a Fund
shareholder in securities, the shareholder may incur transaction expenses in
converting those securities into cash.
The Portfolio has agreed to make a redemption in kind to the Fund whenever
the Fund wishes to make a redemption in kind to a shareholder thereof, and
therefore Fund shareholders that receive redemptions in kind will receive
Portfolio Securities of the Portfolio and in no case will they receive a
security issued by the Portfolio. The Portfolio has advised Security Income Fund
that the Portfolio will not redeem in kind except in circumstances in which the
Fund is permitted to redeem in kind or unless requested by the Fund.
Each investor in the Portfolio, including the Fund, may add to or reduce its
investment in the Portfolio on each business day the Portfolio determines its
NAV. At the close of business on each such day, the value of each investor's
beneficial interest in the Portfolio will be determined by multiplying the NAV
of the Portfolio by the percentage effective for that day that represents that
investor's share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals that are to be effected as of the close of business on
that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to a fraction (a) the numerator of which is the value of the investor's
investment in the Portfolio as of the close of business on that day plus or
minus, as the case may be, the amount of net additions to or withdrawals from
the investor's investment in the Portfolio effected as of the close of business
on that day, and (b) the denominator of which is the aggregate NAV of the
Portfolio as of the close of business on that day plus or minus, as the case may
be, the amount of net additions to or withdrawals from the aggregate investments
in the Portfolio by all investors therein. The percentage so determined will
then be applied to determine the value of the investor's interest in the
Portfolio as the close of business on the following business day.
The Fund and the Portfolio each reserves the right to redeem all of its
shares, if their respective Boards vote to liquidate the Fund and/or Portfolio
as applicable.
OVERVIEW OF TSA ACCOUNTS -- In general, Section 403(b)(7) of the Internal
Revenue Code of 1986, as amended (the "Code") permits public school employees
and employees of certain types of charitable, educational and scientific
organizations specified in Section 501(c)(3) of the Code to purchase shares of a
mutual fund through a custodial account, and, subject to certain limitations, to
exclude the amount of purchase payments from gross income for tax purposes.
Shares of the Fund may be purchased in connection with a TSA custodial account.
TSA Accounts may provide significant tax savings to individuals, but are
governed by a complex set of tax rules under the Code and the regulations
promulgated by the Department of the Treasury thereunder.
If you already have a Security Funds TSA custodial account, you may be able
to invest in the Fund. If you do not presently have a Security Funds TSA
custodial account and you meet the requirements of the applicable tax rules, you
may be able to create a Security Funds TSA custodial account (or a TSA custodial
account from another provider that makes shares of the Fund available to its
customers) and invest in shares of the Fund through that TSA. Class A shares may
not be available to TSA custodial accounts opened on or after June 5, 2000. The
minimum initial or subsequent investment in a Security Funds TSA custodial
account is $50. An annual administration fee of $25 is required for each
Security Funds TSA custodial account with a balance less than $25,000 and a $5
withdrawal fee will be charged when any Security Funds TSA custodial account is
closed.
You may request loans from your Security Funds TSA custodial account, subject
to limitations on the number and amount of loans. An administration fee of $125
will be charged at the time of application for a loan and a $50 loan maintenance
fee will be deducted each year from the account balance. Loan repayments will be
treated as purchases for the purpose of determining any applicable deferred
sales charge. See "How to Purchase Shares," page 26, for a discussion of the
application of deferred sales charges to Class B and Class C shares. Loans may
not be available from certain accounts, including those opened prior to June 5,
2000. Please contact Security Management Company, LLC concerning loan
availability.
Included in Appendix B is a general discussion of some TSA features. HOWEVER,
TSA OWNERS AND OTHER PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR
PROFESSIONAL TAX AND FINANCIAL ADVISERS BEFORE ESTABLISHING A TSA OR OTHERWISE
INVESTING IN SHARES.
OVERVIEW OF THE TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS
In general, an IRA is a trust or custodial account established in the United
States for the exclusive benefit of an individual or his or her
beneficiaries.(Keogh plans are established by self-employed persons, including
partnerships, and also cover eligible non-owner employees.) Most IRAs are
designed principally as retirement savings vehicles. Education IRAs are designed
to provide a tax-favored means of saving for a child's educational expenses.
IRAs may provide significant tax savings to individuals, but are governed by a
complex set of tax rules set out under the Internal Revenue Code of 1986, as
amended (the "Code"),and the regulations promulgated by the Department of the
Treasury thereunder. If you already have an IRA, your IRA may be able to invest
in the Fund. If you do not presently have an IRA and you meet the requirements
of the applicable tax rules, you may be able to create an IRA and invest in
Shares of the Fund through that IRA. Included below is a general discussion of
some IRA features. However, IRA Owners and other prospective investors should
consult with their professional tax and financial advisers before establishing
an IRA or investing in Shares.
TYPES OF INDIVIDUAL RETIREMENT ACCOUNTS--
TRADITIONAL IRAS. If you are under age 70 1/2, and you (or if you file a
joint return, your spouse) have taxable compensation, you may set up a
Traditional IRA and make annual IRA contributions of up to $2,000, or 100% of
your taxable compensation, whichever is less. Taxable income includes wages,
salaries, and other amounts reported in box 1 of Form W-2, as well as earnings
from self-employment. If you file a joint return and your taxable compensation
is less than that of your spouse, you may make annual contributions to a
Traditional IRA equal to the lesser of $2,000, or the sum of (i) your taxable
compensation and (ii) the taxable compensation of your spouse, reduced by the
amount of his or her IRA deduction for the year. Amounts contributed to a
Traditional IRA generally are deductible for federal income tax purposes.
However, if you were covered by an employer retirement plan, the amount of your
contribution to a Traditional IRA that you may deduct will be reduced or
eliminated if your modified adjusted gross income exceeds certain amounts
(currently $50,000 for a married couple filing a joint return and $30,000 for a
single taxpayer). If your spouse is covered by an employer retirement plan but
you are not, you may be able to deduct your contributions to a Traditional IRA;
however, the deduction will be reduced or eliminated if your adjusted gross
income on a joint return exceeds $150,000. Even if your ability to deduct
contributions to a Traditional IRA is limited, you may still make contributions
up to the limits described above. In general, you may also make a contribution
to a Traditional IRA by "rolling over" all or a portion of a distribution you
receive from a qualified retirement plan (such as a pension or profit-sharing
plan or a 401(k) plan) or another Traditional IRA. Amounts distributed from a
Traditional IRA and eligible rollover distributions from qualified retirement
plans will not be includible in income if they are contributed to a Traditional
IRA in a rollover transaction which meets certain conditions; however, a federal
withholding tax may be imposed on such distributions. Consult your professional
tax adviser for complete details on Traditional IRAs.
ROTH IRAS. Regardless of your age, you may be able to establish a Roth IRA.
Contributions to Roth IRAs are not deductible for federal income tax purposes.
However, if all of the applicable requirements are met, earnings in the account
accumulate tax free, and all withdrawals are also tax free. Generally, you may
contribute up to $2,000 annually to a Roth IRA; however, your ability to
contribute to a Roth IRA will be reduced or eliminated if your adjusted gross
income exceeds certain amounts (currently $150,000 for a married couple filing a
joint return and$95,000 for a single taxpayer). In addition, if you make
contributions to both a Traditional IRA and a Roth IRA, your contribution limit
for the Roth IRA will be reduced by the amount of the contribution you make to
the Traditional IRA. If certain requirements are met, and (i) your modified
adjusted gross income is not more than $100,00, and (ii) you are not married and
filing a separate tax return, you can roll over amounts from a Traditional IRA
to a Roth IRA. The amount rolled over generally will be included in your taxable
income; however, if you roll over from a Traditional IRA to a Roth IRA before
1999, you may elect to have the taxable amount included in your income ratably
over a four-year period. You may also roll over amounts from one Roth IRA to
another Roth IRA. Consult your professional tax adviser for complete details on
Roth IRAs. SEP-IRAs are IRAs that are created in connection with a simplified
employee pension ("SEP") established and maintained by a self-employed
individual, a partnership or a corporation. SEP-IRAs must be created for each
qualifying employee of the employer that establishes a SEP. In general, a
qualifying employee is an employee who has: (i) reached the age of 21; and (ii)
worked for the employer at least three out of the past five years. Each SEP-IRA
is owned by the employee for whom it is created; assets of a SEP are not pooled
together. SEPs must provide for discretionary employer contributions. In other
words, employers are not required to make contributions to SEP-IRAs each year,
but if they do make contributions for any year, the contributions must be based
on a specific allocation formula set forth in the SEP, and must not discriminate
in favor of highly compensated employees. Contributions to SEP-IRAs generally
are deductible by the employer, subject to certain limitations. Contributions to
SEP-IRAs of self-employed individuals are subject to certain additional
limitations. SEP-IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs.
SIMPLE IRAS. In general, a SIMPLE plan may be established by any employer,
including a sole proprietorship, partnership or corporation, with 100 or fewer
employees, and must be the only retirement plan maintained by the employer.
Under a SIMPLE plan using SIMPLE IRAs, a SIMPLE IRA is created for each eligible
employee which, in general, includes all employees who received at least $5,000
in compensation during any two years preceding the year for which eligibility is
being determined (i.e., the current year) and is reasonably expected to earn at
least $5,000 during the current year. As with SEP-IRAs, SIMPLE IRAs are
individual accounts owned by each eligible employee. Under a SIMPLE IRA plan,
eligible employees can elect to contribute a portion of their salary to their
SIMPLE IRA. (These contributions are referred to as "elective deferrals.")
Elective deferrals are based on a stated percentage of the employee's
compensation, and are limited to $6,000 per year (indexed for inflation).
Elective deferrals are included in employees' gross income only for Social
Security and Medicare tax purposes (i.e., they are not included in wages for
federal income tax purposes).In addition to elective deferrals by employees,
under a SIMPLE IRA plan, employers must make either: (i) matching contributions
equal to each employee' selective deferral, up to a maximum of 3% of the
employee's compensation, or (ii) nonelective contributions of 2% of compensation
for each eligible employee(subject to certain limits). Employer contributions to
SIMPLE IRAs are excluded from employees' gross income and are deductible by the
employer. SIMPLE IRAs generally are subject to the same distribution and
rollover rules that apply to Traditional IRAs. However, a rollover from a SIMPLE
IRA to a Traditional IRA can be made tax free only after the employee has
participated in the SIMPLE IRA plan for at least two years.
KEOGH PLANS. Keogh plans are qualified retirement plans established by sole
proprietors or partnerships. As with other qualified retirement plans, in
general, contributions to Keogh plans are deductible, and neither such
contributions nor the investment earnings thereon are subject to tax until they
are distributed by the plan. A number of different types of plans may qualify as
Keogh plans. In certain circumstances, Keogh plans may provide greater tax
advantages than other types of retirement plans. However, Keogh plans must
satisfy a number of complex rules, including minimum participation requirements,
under which certain employees must be covered by the plan, and in some cases,
minimum funding requirements. Professional assistance generally is required to
establish and maintain a Keogh plan.
EDUCATION IRAS. An education IRA is a trust or custodial account created for
the purpose of paying the qualified higher education expenses of a designated
beneficiary, i.e., a child under the age of 18 at the time of the contributions.
In general, qualified higher education expenses include expenses for tuition,
fees, books, supplies and equipment required for the designated beneficiary of
the Education IRA to attend an eligible educational institution, which includes
essentially all accredited post-secondary educational institutions. Any
individual may make contributions to an education IRA so long as his or her
modified adjusted gross income is less than $110,000 ($160,000 for married
taxpayers filing jointly).The maximum total contributions that may be made to
education IRAs for each child is $500 per year. Generally, amounts may be rolled
over from an Education IRA to another education IRA established for the same
beneficiary or for certain members of the beneficiary's family. Beneficiaries
may make tax free withdrawals from education IRAs to pay qualified higher
education expenses. Other withdrawals generally will be subject to tax. Consult
your professional tax adviser for complete details on Education IRAs.
OWNERSHIP OF SHARES THROUGH PLANS
Fund Shares owned by Plan Participants through Plans are held either directly by
the respective Plan, or beneficially through vehicles such as bank collective
funds or insurance company separate accounts consisting solely of such Plans
(collectively, "Plan Pools"), which will in turn offer the Fund as an investment
option to their participants. Investments in the Fund may by themselves
represent an investment option for a Plan or may be combined with other
investments as part of a pooled investment option for the Plan. In the latter
case, the Fund may require Plans to provide information regarding the withdrawal
order and other characteristics of any pooled investment option in which the
Shares are included prior to a Plan's initial investment in the Fund.
Thereafter, the Fund will require the Plan to provide information regarding any
changes to the withdrawal order and other characteristics of the pooled
investment option before such changes are implemented. The Fund in its sole
discretion may decline to sell Shares to Plans if the governing withdrawal order
or other characteristics of any pooled investment option in which the Shares are
included is determined at any time to be disadvantageous to the Fund. Plan
Participants should contact their Plan administrator or the organization that
provides recordkeeping services if they have questions concerning their account.
Plan administrators and fiduciaries should call 1-800-888-2461 for information
regarding a Plan's account with the Fund.
QUALIFIED REDEMPTIONS
At any time, a redemption of Fund Shares can be effected without assessment of
the Redemption Fee as described in the Prospectus, if such redemption is a
"Qualified Plan Redemption," a "Qualified TSA Redemption" or a "Qualified IRA
Redemption." "Qualified Plan Redemptions" are redemptions resulting from a Plan
Participant's death, disability, retirement or termination of employment or to
make loans to, or "in service" withdrawals by, a Plan Participant.
A "Qualified TSA Redemption" is a redemption made by an owner of a TSA
account to effect a distribution from his or her account that is not subject to
the 10% penalty tax imposed by section 72(t), other than a rollover from a TSA
account to an IRA or other TSA account and, direct trustee-to-trustee transfers,
unless the owner continues the investment of the transferred amount in the Fund.
In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer who owns a TSA account prior to the date on
which the taxpayer reaches age 59 1/2, unless the distribution meets the
requirements of a specific exception to the penalty tax. In general, rollovers
from a TSA account to an IRA, from one TSA account to another and direct
trustee-to-trustee transfers from one TSA account to another TSA account are not
subject to tax. TSA account owners requesting a redemption of Fund Shares will
be required to provide a written statement as to whether the proceeds of the
redemption will be subject to a penalty tax and, if not, to identify the
specific exception upon which the owner intends to rely. The information
provided by the owner will be reflected on the Form 1099-R issued to the owner
and filed with the Internal Revenue Service in connection with the redemption as
well as forming the basis for redemption as a Qualified TSA Redemption. The Fund
may require additional evidence, such as the opinion of a certified public
accountant or tax attorney, that any particular redemption will not be subject
to any penalty tax. TSA ACCOUNT OWNERS SHOULD CONSULT THEIR TAX ADVISERS
REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified TSA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified TSA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
In general, the early withdrawal penalty tax imposed by the Code will not
apply to the following types of distributions from a TSA account:
1. Distributions made on or after the date on which the TSA account owner
attains age 59 1/2;
2. Distributions made to a beneficiary (or to the estate of the TSA account
owner) on or after the death of the TSA account owner;
3. Distributions attributable to the TSA account owner being disabled;
4. Distributions made to the TSA account owner after separation from service
after age 55;
5. Distributions to an alternate payee (e.g. a former spouse) pursuant to a
qualified domestic relations order;
6. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the TSA
account owner, or the joint lives (or life expectancies) of the TSA account
owner and his or her designated beneficiary, after the TSA account owner
separates from service;
7. Distributions made to a TSA account owner for medical care, but not in
excess of the amount allowable as a medical expense deduction by the TSA
account owner on his or her tax return for the year;
8. Distributions timely made to correct an excess contribution; and
9. Distributions timely made to reduce an excess elective deferral.
A "Qualified IRA Redemption" is a redemption made by an IRA Owner to effect a
distribution from his or her IRA account that is not subject to the 10% penalty
tax imposed by section 72(t) or 530(d), as applicable, other than IRA rollovers,
direct trustee-to-trustee transfers and conversions of Traditional IRAs to Roth
IRAs, unless the IRA Owner continues the investment of the transferred amount in
the Fund. In general, section 72(t) of the Code imposes a 10% penalty tax on any
distribution received by a taxpayer from a Traditional IRA, SEP-IRA or SIMPLE
IRA prior to the date on which the taxpayer reaches age 59 1/2, unless the
distribution meets the requirements of a specific exception to the penalty tax.
Similar penalties apply to early withdrawals from Roth IRAs and Keogh Plans.
Section 530(d) as currently written, imposes a separate 10% penalty tax on
distributions from an education IRA not used to pay qualified higher education
expenses. In general, rollovers from one IRA to another and direct
trustee-to-trustee transfers from an IRA to another IRA (or in some cases to
other types of qualified plans) are not subject to tax. In addition, conversions
of Traditional IRAs to Roth IRAs are subject to income tax but are not subject
to the early withdrawal penalty tax. IRA Owners requesting a redemption of Fund
Shares will be required to provide a written statement as to whether the
proceeds of the redemption will be subject to a penalty tax and, if not, to
identify the specific exception upon which the IRA Owner intends to rely. The
information provided by the IRA Owner will be reflected on the Form 1099-R
issued to the IRA Owner and filed with the Internal Revenue Service in
connection with the redemption as well as forming the basis for redemption as a
Qualified IRA Redemption. The Fund may require additional evidence, such as the
opinion of a certified public accountant or tax attorney, that any particular
redemption will not be subject to any penalty tax. IRA OWNERS SHOULD CONSULT
THEIR TAX ADVISERS REGARDING THE TAX CONSEQUENCES OF ANY REDEMPTION.
Some of the exceptions to the 10% penalty taxes are described below. This
description is intended to provide only a brief summary of the principal
exceptions to the additional tax imposed on early withdrawals under the current
provisions of the Code, which may change from time to time. The Fund intends to
conform the definition of Qualified IRA Redemptions to changes in applicable tax
laws; however, the Fund reserves the right to continue to define Qualified IRA
Redemptions by reference to Code provisions now in effect or otherwise to define
such phrase independently of future Code provisions.
TRADITIONAL IRAS, SEP-IRAS AND SIMPLE IRAS -- In general, the 10% penalty tax
imposed by section 72(t) of the Code will not apply to the following types of
distributions from a Traditional IRA, SEP-IRA or SIMPLE IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner to the extent such distributions do not
exceed the amount of unreimbursed medical expenses allowed as a deduction
under section 213 of the Code;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount paid for medical insurance as described in section
213(d)(1)(D) of the Code for the IRA Owner, and his or her spouse and
dependents;
6. Distributions to an IRA Owner to the extent such distributions do not exceed
the qualified higher education expenses, as defined in section 72(t)(7), for
the IRA Owner;
7. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t)(8) of the Code; and
8. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
ROTH IRAS -- With respect to a Roth IRA, all "qualified distributions" are
excluded from gross income and, therefore, from the 10% penalty tax imposed by
section 72(t). In general, qualified distributions from a Roth IRA include:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code; and
4. Distributions to an IRA Owner that are used to acquire a first home, and
that meet the definition of "qualified first-time homebuyer distributions"
under section 72(t)(8) of the Code.
However, a distribution will not be a qualified distribution, even if it
otherwise meets the definition, if it is made within the 5-year period beginning
with the first taxable year for which the IRA Owner made a contribution to the
Roth IRA (or such person's spouse made a contribution to a Roth IRA established
for the IRA Owner). Special rules apply with respect to certain types of
rollovers.
To the extent a distribution from a Roth IRA is not a qualified distribution,
either because it does not meet the definition of a qualified distribution in
the first instance, or because it is made within the five-year period described
in section 408A(d)(2)(B), the portion of the distribution that represents
earnings will be subject to tax in accordance with section 72 of the Code,
including the 10% penalty tax imposed under section 72(t). The same exceptions
to the penalty tax that apply to Traditional IRAs will apply to nonqualified
distributions from Roth IRAs.
In the event of a nonqualified distribution from a Roth IRA, only the
earnings in the account are subject to tax; contributions may be recovered
tax-free (since no deduction is permitted for such contributions). Section
408A(d) provides that distributions from Roth IRAs are considered to come first
from contributions, to the extent that distributions do not exceed the total
amount of contributions.
KEOGH PLANS -- In general, the 10% penalty tax imposed by section 72(t) of the
Code will not apply to the following types of distributions from a Traditional
IRA:
1. Distributions made on or after the date on which the IRA Owner attains age
59 1/2;
2. Distributions made to a beneficiary (or to the estate of the IRA Owner) on
or after the death of the IRA Owner;
3. Distributions attributable to the IRA Owner's being disabled within the
meaning of section 72(m)(7) of the Code;
4. Distributions made to the IRA Owner after separation from service after age
55;
5. Distributions to unemployed individuals to the extent such distributions do
not exceed the amount of unreimbursed medical expenses allowed as a
deduction under section 213 of the Code;
6. Distributions to an alternate payee (e.g., a former spouse) pursuant to a
qualified domestic relations order; and
7. Distributions that are part of a series of substantially equal periodic
payments made at least annually for the life (or life expectancy) of the IRA
Owner, or the joint lives (or life expectancies) of the IRA Owner and his or
her designated beneficiary.
EDUCATION IRAS -- Distributions from an education IRA are included in income
unless the qualified higher education expenses of the designated beneficiary are
equal to or greater than the amount of such distributions. In addition, certain
special rules are provided that permit certain rollovers or changes in
beneficiaries. Any distribution that is subject to tax under section 530 is also
subject to the 10% penalty tax imposed by section 530(d)(4). Thus, in general,
any distribution from an education IRA that exceeds the amount of qualified
higher education expenses of the designated beneficiary will be subject to the
10% penalty tax.
HOW TO PURCHASE SHARES
Investors may purchase shares of the Fund through authorized dealers who are
members of the National Association of Securities Dealers, Inc. In addition,
banks and other financial institutions may make shares of the Fund available to
their customers. (Banks and other financial institutions that make shares of the
Fund available to their customers in Texas must be registered with that state as
securities dealers.) The minimum initial investment is $100. The minimum
subsequent investment is $100 unless made through an Accumulation Plan which
allows for subsequent investments of $20. An application may be obtained from
the Fund Administrator.
As a convenience to investors and to save operating expenses, the Fund does
not issue certificates for full shares except upon written request by the
investor or his or her investment dealer. Certificates will be issued at no cost
to the stockholder. No certificates will be issued for fractional shares and
fractional shares may be withdrawn only by redemption for cash.
Orders for the purchase of shares of the Fund will be confirmed at an
offering price equal to the net asset value per share next determined after
receipt of the order in proper form by Security Distributors, Inc. (the
"Distributor") (generally as of the close of the Exchange on that day) plus the
sales charge in the case of Class A shares. Orders received by dealers or other
firms prior to the close of the Exchange and received by the Distributor prior
to the close of its business day will be confirmed at the offering price
effective as of the close of the Exchange on that day. Dealers and other
financial services firms are obligated to transmit orders promptly.
The Fund reserves the right to withdraw all or any part of the offering made
by this prospectus and to reject purchase orders.
ALTERNATIVE PURCHASE OPTIONS -- The Fund offers three classes of shares:
CLASS A SHARES - FRONT-END LOAD OPTION. Class A shares are sold with a sales
charge at the time of purchase. Class A shares are not subject to a sales charge
when they are redeemed (except that shares sold in an amount of $1,000,000 or
more without a front-end sales charge will be subject to a contingent deferred
sales charge of 1% for one year). See Appendix B for a discussion of "Rights of
Accumulation" and "Statement of Intention," which options may serve to reduce
the front-end sales charge.
CLASS B SHARES - BACK-END LOAD OPTION. Class B shares are sold without a
sales charge at the time of purchase, but are subject to a deferred sales charge
if they are redeemed within five years of the date of purchase. Class B shares
will automatically convert to Class A shares at the end of eight years after
purchase.
CLASS C SHARES - LEVEL LOAD OPTION. Class C shares are sold without a sales
charge at the time of purchase, but are subject to a contingent deferred sales
charge if they are redeemed within one year of the date of purchase.
The decision as to which class is more beneficial to an investor depends on
the amount and intended length of the investment. Investors who would rather pay
the entire cost of distribution at the time of investment, rather than spreading
such cost over time, might consider Class A shares. Other investors might
consider Class B or Class C shares, in which case 100% of the purchase price is
invested immediately, depending on the amount of the purchase and the intended
length of investment.
Dealers or others may receive different levels of compensation depending on
which class of shares they sell.
CLASS A SHARES -- Class A shares are offered at net asset value plus an initial
sales charge as follows:
--------------------------------------------------------------------------------
SALES CHARGE
---------------------------------------------
PERCENTAGE PERCENTAGE OF PERCENTAGE
AMOUNT OF PURCHASE OF OFFERING NET AMOUNT REALLOWABLE
AT OFFERING PRICE PRICE INVESTED TO DEALERS
--------------------------------------------------------------------------------
Less than $100,000................. 3.50% 3.63% 3.00%
$100,000 but less than $500,000.... 2.50 2.56 2.00
$500,000 but less than $1,000,000.. 1.50 1.52 1.00
$1,000,000 and over................ None None (See below)
--------------------------------------------------------------------------------
The Distributor will pay a commission to dealers on purchases of $1,000,000
or more as follows: .50% on sales up to $5,000,000, plus .25% on sales of
$5,000,000 or more up to $10,000,000, and .10% on any amount of $10,000,000 or
more.
CLASS A DISTRIBUTION PLAN -- As discussed in the prospectus, the Fund has a
Distribution Plan for its Class A shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Plan authorizes the Fund to pay an annual
fee to the Distributor of .25% of the average daily net asset value of the Class
A shares of the Fund to finance various activities relating to the distribution
of such shares of the Fund to investors. These expenses include, but are not
limited to, the payment of compensation (including compensation to securities
dealers and other financial institutions and organizations) to obtain various
administrative services for the Fund. These services include, among other
things, processing new shareholder account applications and serving as the
primary source of information to customers in answering questions concerning the
Fund and their transactions with the Fund. The Distributor is also authorized to
engage in advertising, the preparation and distribution of sales literature and
other promotional activities on behalf of the Fund. The Distributor is required
to report in writing to the Board of Directors of Security Income Fund and the
board will review at least quarterly the amounts and purpose of any payments
made under the Plan. The Distributor is also required to furnish the board with
such other information as may reasonably be requested in order to enable the
board to make an informed determination of whether the Plan should be continued.
The Plan became effective on February 10, 1999. The Plan will continue from
year to year, provided that such continuance is approved at least annually by a
vote of a majority of the Board of Directors of the Fund, including a majority
of the independent directors cast in person at a meeting called for the purpose
of voting on such continuance. The Plan can be terminated at any time on 60
days' written notice, without penalty, if a majority of the disinterested
directors or the Class A shareholders vote to terminate the Plan. Any agreement
relating to the implementation of the Plan terminates automatically if it is
assigned. The Plan may not be amended to increase materially the amount of
payments thereunder without approval of the Class A shareholders of the Fund.
Because all amounts paid pursuant to the Distribution Plan are paid to the
Distributor, the Fund Administrator and its officers, directors and employees,
including Messrs. Cleland and Schmank (directors of the Fund), Messrs. Swank,
Swickard, Eshnaur, Bowser, Ms. Harwood and Ms. Lee (officers of the Fund), all
may be deemed to have a direct or indirect financial interest in the operation
of the Distribution Plan. None of the independent directors have a direct or
indirect financial interest in the operation of the Distribution Plan.
Benefits from the Distribution Plan may accrue to the Fund and its
stockholders from the growth in assets due to sales of shares to the public
pursuant to the Distribution Agreement with the Distributor. Increases in the
net assets of the Fund from sales pursuant to its Distribution Plan and
Agreement may benefit shareholders by reducing per share expenses, permitting
increased investment flexibility and diversification of such Fund's assets, and
facilitating economies of scale (e.g., block purchases) in the Fund's securities
transactions.
CLASS B SHARES -- Class B shares are offered at net asset value, without an
initial sales charge. With certain exceptions, the Fund may impose a deferred
sales charge on shares redeemed within five years of the date of purchase. No
deferred sales charge is imposed on amounts redeemed thereafter. If imposed, the
deferred sales charge is deducted from the redemption proceeds otherwise payable
to you. The deferred sales charge is retained by the Distributor.
Whether a contingent deferred sales charge is imposed and the amount of the
charge will depend on the number of years since the investor made a purchase
payment from which an amount is being redeemed, according to the following
schedule:
-------------------------------------------------------------------------
YEAR SINCE PURCHASE PAYMENT WAS MADE CONTINGENT DEFERRED SALES CHARGE
-------------------------------------------------------------------------
First............................... 5%
Second.............................. 4%
Third............................... 3%
Fourth.............................. 3%
Fifth............................... 2%
Sixth and Following................. 0%
-------------------------------------------------------------------------
Class B shares (except shares purchased through the reinvestment of dividends
and other distributions paid with respect to Class B shares) will automatically
convert, on the eighth anniversary of the date such shares were purchased, to
Class A shares which are subject to a lower distribution fee. This automatic
conversion of Class B shares will take place without imposition of a front-end
sales charge or exchange fee. (Conversion of Class B shares represented by stock
certificates will require the return of the stock certificates to the transfer
agent.) All shares purchased through reinvestment of dividends and other
distributions paid with respect to Class B shares ("reinvestment shares") will
be considered to be held in a separate subaccount. Each time any Class B shares
(other than those held in the subaccount) convert to Class A shares, a pro rata
portion of the reinvestment shares held in the subaccount will also convert to
Class A shares. Class B shares so converted will no longer be subject to the
higher expenses borne by Class B shares. Because the net asset value per share
of the Class A shares may be higher or lower than that of the Class B shares at
the time of conversion, although the dollar value will be the same, a
shareholder may receive more or less Class A shares than the number of Class B
shares converted. Under current law, it is the Fund's opinion that such a
conversion will not constitute a taxable event under federal income tax law. In
the event that this ceases to be the case, the Board of Directors will consider
what action, if any, is appropriate and in the best interests of the Class B
stockholders.
CLASS B DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class B shares under a Distribution Plan adopted with respect to its Class B
shares ("Class B Distribution Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("1940 Act"). This Plan provides for payments at an annual
rate of .75% of the average daily net asset value of Class B shares. Amounts
paid by the Fund are currently used to pay dealers and other firms that make
Class B shares available to their customers (1) a commission at the time of
purchase normally equal to 2.75% of the value of each share sold and (2) a
service fee for account maintenance and personal service to shareholders payable
for the first year, initially, and for each year thereafter, quarterly, in an
amount equal to .25% annually of the average daily net asset value of Class B
shares sold by such dealers and other firms and remaining outstanding on the
books of the Fund.
Rules of the National Association of Securities Dealers, Inc. ("NASD") limit
the aggregate amount that a Fund may pay annually in distribution costs for the
sale of its Class B shares to 6.25% of gross sales of Class B shares since the
inception of the Distribution Plan, plus interest at the prime rate plus 1% on
such amount (less any contingent deferred sales charges paid by Class B
shareholders to the Distributor). The Distributor intends, but is not obligated,
to continue to pay or accrue distribution charges incurred in connection with
the Class B Distribution Plan which exceed current annual payments permitted to
be received by the Distributor from the Fund. The Distributor intends to seek
full payment of such charges from the Fund (together with annual interest
thereon at the prime rate plus 1%) at such time in the future as, and to the
extent that, payment thereof by the Fund would be within permitted limits.
The Fund's Class B Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class B shares. In the event the
Class B Distribution Plan is terminated by the Class B stockholders or the
Funds' Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses incurred
by the Distributor in excess of those payments would be absorbed by the
Distributor. The Fund makes no payments in connection with the sales of its
shares other than the distribution fee paid to the Distributor.
CLASS C SHARES -- Class C shares of the Fund are offered at net asset value,
without an initial sales charge. With certain exceptions, the Fund may impose a
deferred sales charge on shares redeemed within one year of the date of
purchase. No deferred sales charge is imposed on amounts redeemed thereafter. If
imposed, the deferred sales charge is deducted from the redemption proceeds
otherwise payable to you. The deferred sales charge is retained by the
Distributor.
CLASS C DISTRIBUTION PLAN -- The Fund bears some of the costs of selling its
Class C shares under a Distribution Plan adopted with respect to its Class C
shares ("Class C Distribution Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 ("1940 Act"). This Plan provides for payments at an annual
rate of .50% of the average daily net asset value of Class C shares. Amounts
paid by the Fund are currently used to pay dealers and other firms that make
Class C shares available to their customers (1) a commission at the time of
purchase normally equal to .25% of the value of each share sold, and for each
year thereafter, quarterly, in an amount equal to .25% annually of the average
daily net asset value of Class C shares sold by such dealers and other firms and
remaining outstanding on the books of the Fund and (2) a service fee payable for
the first year initially, and for each year thereafter, quarterly, in an amount
equal to .25% annually of the average daily net asset value of Class C shares
sold by such dealers and other firms and remaining outstanding on the books of
the Fund.
Rules of the NASD limit the aggregate amount that a Fund may pay annually in
distribution costs for the sale of its Class C shares to 6.25% of gross sales of
Class C shares since the inception of the Distribution Plan, plus interest at
the prime rate plus 1% on such amount (less any contingent deferred sales
charges paid by Class C shareholders to the Distributor). The Distributor
intends, but is not obligated, to continue to pay or accrue distribution charges
incurred in connection with the Class C Distribution Plan which exceed current
annual payments permitted to be received by the Distributor from the Fund. The
Distributor intends to seek full payment of such charges from the Fund (together
with annual interest thereon at the prime rate plus 1%) at such time in the
future as, and to the extent that, payment thereof by the Fund would be within
permitted limits.
The Fund's Class C Distribution Plan may be terminated at any time by vote of
its directors who are not interested persons of the Fund as defined in the 1940
Act or by vote of a majority of the outstanding Class C shares. In the event the
Class C Distribution Plan is terminated by the Class C stockholders or the
Fund's Board of Directors, the payments made to the Distributor pursuant to the
Plan up to that time would be retained by the Distributor. Any expenses incurred
by the Distributor in excess of those payments would be absorbed by the
Distributor. The Fund makes no payments in connection with the sales of their
shares other than the distribution fee paid to the Distributor.
CALCULATION AND WAIVER OF CONTINGENT DEFERRED SALES CHARGES -- Any contingent
deferred sales charge imposed upon redemption of Class A shares (purchased in
amounts of $1,000,000 or more), Class B shares and Class C shares is a
percentage of the lesser of (1) the net asset value of the shares redeemed or
(2) the net cost of such shares. No contingent deferred sales charge is imposed
upon redemption of amounts derived from (1) increases in the value above the net
cost of such shares due to increases in the net asset value per share of the
Fund; (2) shares acquired through reinvestment of income dividends and capital
gain distributions; or (3) Class A shares (purchased in amounts of $1,000,000 or
more) or Class C shares held for more than one year or Class B shares held for
more than five years. Upon request for redemption, shares not subject to the
contingent deferred sales charge will be redeemed first. Thereafter, shares held
the longest will be the first to be redeemed.
The contingent deferred sales charge is waived: (1) following the death of a
stockholder if redemption is made within one year after death; (2) upon the
disability (as defined in section 72(m)(7) of the Internal Revenue Code) of a
stockholder prior to age 65 if redemption is made within one year after the
disability, provided such disability occurred after the stockholder opened the
account; (3) in connection with required minimum distributions in the case of an
IRA, SAR-SEP or Keogh or any other retirement plan qualified under Section
401(a), 401(k) or 403(b) of the Code; and (4) in the case of distributions from
retirement plans qualified under Section 401(a) or 401(k) of the Internal
Revenue Code due to (i) returns of excess contributions to the plan, (ii)
retirement of a participant in the plan, (iii) a loan from the plan (repayment
of loans, however, will constitute new sales for purposes of assessing the
contingent deferred sales charge), (iv) "financial hardship" of a participant in
the plan, as that term is defined in Treasury Regulation Section
1.401(k)-1(d)(2), as amended from time to time, (v) termination of employment of
a participant in the plan, (vi) any other permissible withdrawal under the terms
of the plan.
ARRANGEMENTS WITH BROKER-DEALERS AND OTHERS -- To the extent permitted by
applicable law, the Fund's Administrator or Distributor, from time to time, will
provide promotional incentives or pay a bonus, to certain dealers whose
representatives have sold or are expected to sell significant amounts of the
Fund and/or certain other funds managed by the Fund Administrator. Such
promotional incentives will include payment for attendance (including travel and
lodging expenses) by qualifying registered representatives (and members of their
families) at sales seminars at luxury resorts within or without the United
States. Bonus compensation may include reallowance of the entire sales charge
and may also include, with respect to Class A shares, an amount which exceeds
the entire sales charge and, with respect to Class B or Class C shares, an
amount which exceeds the maximum commission. The Distributor, or the Fund
Administrator, may also provide financial assistance to certain dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns, and/or shareholder
services and programs regarding one or more of the funds managed by the Fund
Administrator. Certain of the promotional incentives or bonuses may be financed
by payments to the Distributor under a Rule 12b-1 Distribution Plan. The payment
of promotional incentives and/or bonuses will not change the price an investor
will pay for shares or the amount that the Fund will receive from such sale. No
compensation will be offered to the extent it is prohibited by the laws of any
state or self-regulatory agency, such as the NASD. A dealer to whom
substantially the entire sales charge of Class A shares is reallowed may be
deemed to be an "underwriter" under federal securities laws.
The Distributor also may pay banks and other financial services firms that
facilitate transactions in shares of the Fund for their clients a transaction
fee up to the level of the payments made allowable to dealers for the sale of
such shares as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Fund's Board of Directors would consider what
action, if any, would be appropriate.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
PURCHASES AT NET ASSET VALUE -- Class A shares of the Fund may be purchased at
net asset value by (1) directors, officers and employees of the Fund, the Fund's
Administrator or Distributor; directors, officers and employees of Security
Benefit Life Insurance Company and its subsidiaries; agents licensed with
Security Benefit Life Insurance Company; spouses or minor children of any such
agents; as well as the following relatives of any such directors, officers and
employees (and their spouses): spouses, grandparents, parents, children,
grandchildren, siblings, nieces and nephews; (2) any trust, pension, profit
sharing or other benefit plan established by any of the foregoing corporations
for persons described above; (3) retirement plans where third party
administrators of such plans have entered into certain arrangements with the
Distributor or its affiliates provided that no commission is paid to dealers;
and (4) officers, directors, partners or registered representatives (and their
spouses and minor children) of broker-dealers who have a selling agreement with
the Distributor. Such sales are made upon the written assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be transferred or resold except through redemption or repurchase by or on
behalf of the Fund.
Class A shares of the Fund may also be purchased at net asset value when the
purchase is made on the recommendation of (i) a registered investment adviser,
trustee or financial intermediary who has authority to make investment decisions
on behalf of the investor; or (ii) a certified financial planner or registered
broker-dealer who either charges periodic fees to its customers for financial
planning, investment advisory or asset management services, or provides such
services in connection with the establishment of an investment account for which
a comprehensive "wrap fee" is imposed. The Distributor must be notified when a
purchase is made that qualifies under this provision.
MANAGEMENT OF THE FUND AND TRUST
The Board of Directors of Security Income Fund and the Board of Trustees of the
Portfolio Trust (collectively, the Directors) are each composed of persons
experienced in financial matters who meet throughout the year to oversee the
activities of the Fund or the Portfolio, respectively. In addition, the
Directors review contractual arrangements with companies that provide services
to the Fund/Portfolio and review the Fund's performance.
The Directors and officers of the Security Income Fund and the Portfolio
Trust, their birth dates, and their principal occupations during the past five
years are set forth below. Their titles may have varied during that period.
Unless otherwise indicated, the address of each officer and director of Security
Income Fund is 700 Harrison Street, Topeka, Kansas 66636-0001 and the address of
each officer of the Portfolio Trust is One South Street, Baltimore, Maryland
21202.
DIRECTORS AND OFFICERS OF SECURITY INCOME FUND--
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
NAME, ADDRESS, AND AGE POSITION(S) HELD WITH FUND PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John D. Cleland,* 63 President and Director Senior Vice President and Managing Member Representative,
(Birth date: May 1, 1936) Security Management Company, LLC; Senior Vice President, Security
Benefit Group, Inc. and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Donald A. Chubb, Jr.,** 53 Director Business broker, Griffith & Blair Realtors. Prior to 1997,
(Birth date: December 14, 1946) President, Neon Tube Light Company, Inc
2222 SW 29th Street
Topeka, Kansas 66611
------------------------------------------------------------------------------------------------------------------------------------
Penny A. Lumpkin,** 60 Director Owner, Vivian's Gift Shop (Corporate Retail); Vice President,
(Birth date: August 20, 1939) Palmer Companies, Inc. (Small Business and Shopping Center
3616 Canterbury Town Road Development) and Bellairre Shopping Center LLC (Managing and
Topeka, Kansas 66610 Leasing); Partner, Goodwin Enterprises (Retail). Prior to 1999,
Vice President and Treasurer, Palmer News, Inc.; Vice President,
M/S News, Inc. and Secretary, Kansas City Periodicals.
------------------------------------------------------------------------------------------------------------------------------------
Mark L. Morris, Jr.,** 65 Director Retired; Former General Partner, Mark Morris Associates
(Birth date: February 3, 1934) (Veterinary Research and Education)
5500 SW 7th Street
Topeka, Kansas 66606
------------------------------------------------------------------------------------------------------------------------------------
Maynard Oliverius, 56 Director President and Chief Executive Officer, Stormont-Vail HealthCare
(Birth date: December 18, 1943)
1500 SW 10th Avenue
Topeka, Kansas 66604
------------------------------------------------------------------------------------------------------------------------------------
James R. Schmank,* 46 Director and Vice President President and Managing Member Representative, Security Management
(Birth date: February 21, 1953) Company, LLC; Senior Vice President, Security Benefit Group, Inc.
and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Amy J. Lee, 38 Secretary Secretary, Security Management Company, LLC; Vice President,
(Birth date: June 5, 1961) Associate General Counsel and Assistant Secretary, Security
Benefit Group, Inc. and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Brenda M. Harwood, 36 Treasurer Assistant Vice President and Treasurer, Security Management
(Birth date: November 3, 1963) Company, LLC; Assistant Vice President, Security Benefit Group,
Inc. and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Steven M. Bowser, 39 Vice President Vice President and Portfolio Manager, Security Management
(Birth date: February 11, 1960) Company, LLC; Vice President, Security Benefit Group, Inc. and
Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Swank, 40 Vice President Senior Vice President and Portfolio Manager, Security Management
(Birth date: January 10, 1960) Company, LLC; Senior Vice President and Chief Investment Officer,
Security Benefit Group, Inc. and Security Benefit Life Insurance
Company
------------------------------------------------------------------------------------------------------------------------------------
David Eshnaur, 39 Vice President Assistant Vice President and Portfolio Manager, Security
(Birth date: October 8, 1960) Management Company, LLC. Prior to July 1997, Assistant Vice
President and Assistant Portfolio Manager, Waddell & Reed.
------------------------------------------------------------------------------------------------------------------------------------
Christopher D. Swickard, 34 Assistant Secretary Assistant Secretary, Security Management Company, LLC; Assistant
(Birth date: October 9, 1965) Vice President and Assistant Counsel, Security Benefit Group,
Inc. and Security Benefit Life Insurance Company
------------------------------------------------------------------------------------------------------------------------------------
<FN>
*These directors are deemed to be "interested persons" of the Fund.
**These directors serve on the Fund's audit committee, the purpose of which (among other things) is to meet with independent
auditors, to review the work of the auditors, and to oversee the handling by Security Management Company, LLC of the accounting
function for the Fund.
</FN>
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The officers of Security Income Fund hold identical offices with each of the
other mutual funds in the Security Funds Family, except Messrs. Eshnaur, Bowser
and Swank who hold the same office only with respect to SBL Fund. The directors
of Security Income Fund also serve as directors of each of the other Security
Funds. Ms. Lee is also Secretary of the Distributor, Messrs. Cleland and Schmank
are directors and Vice Presidents of the Distributor and Ms. Harwood is a
director and Treasurer of the Distributor.
TRUSTEES OF BT INVESTMENT PORTFOLIOS--
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH
NAME, ADDRESS, AND AGE THE TRUSTS AND PORTFOLIO PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles P. Biggar, 69 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: October 13, 1930) Complex(1); Retired; former Vice President, International Business
12 Hitching Post Lane Machines ("IBM") and President, National Services and the Field
Chappaqua, New York 10514 Engineering Divisions of IBM
------------------------------------------------------------------------------------------------------------------------------------
S. Leland Dill, 69 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: March 28, 1930) Complex; Retired; Director, Coutts (U.S.A.) International; Trustee,
5070 North Ocean Drive Phoenix-Zweig Trust(2) and Phoenix-Euclid Market Neutral Fund(2);
Singer Island, Florida 33404 former Partner, KPMG Peat Marwick; Director, Vintners International
Company Inc.; Director, Coutts Trust Holdings Ltd., Director,
Coutts Group; General Partner, Pemco(2)
------------------------------------------------------------------------------------------------------------------------------------
Martin J. Gruber, 62 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: July 15, 1937) Complex; Nomura Professor of Finance, Leonard N. Stern School of
229 South Irving Street Business, New York University (since 1964); Trustee, TIAA(2);
Ridgewood, New Jersey 07450 Trustee, SG Cowen Mutual Funds(2); Trustee, Japan Equity Fund(2);
Trustee, Taiwan Equity Fund(2)
------------------------------------------------------------------------------------------------------------------------------------
Richard Hale,* 54 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: July 17, 1945) Complex; Managing Director, Deutsche Asset Management; Director,
205 Woodbrook Lane Flag Investors Funds(2); Managing Director, Deutsche Banc Alex.
Baltimore, Maryland 21212 Brown Incorporated; Director and President, Investment Company
Capital Corp.
------------------------------------------------------------------------------------------------------------------------------------
Richard J. Herring, 53 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: February 18, 1946) Complex; Jacob Safra Professor of International Banking, Professor
325 South Roberts Road of Finance and Vice Dean, The Wharton School, University of
Bryn Mawr, Pennsylvania 19010 Pennsylvania (since 1972)
------------------------------------------------------------------------------------------------------------------------------------
Bruce E. Langton, 68 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: May 10, 1931) Complex; Retired; Trustee, Allmerica Financial Mutual Funds
99 Jordan Lane (1992-present); Member, Pension and Thrift Plans and Investment
Stamford, Connecticut 06903 Committee, Unilever U.S. Corporation (1989 to present)(3);
Director, TWA Pilots Directed Account Plan and 401(k) Plan (1988 to
present)(2)
------------------------------------------------------------------------------------------------------------------------------------
Philip Saunders, Jr., 64 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: October 11, 1935) Complex; Principal, Philip Saunders Associates (Economic and
445 Glen Road Financial Analysis); former Director, Financial Industry
Weston, Massachusetts 02193 Consulting, Wolf & Company; President, John Hancock Home Mortgage
Corporation; Senior Vice President of Treasury and Financial
Services, John Hancock Mutual Life Insurance Company, Inc.
------------------------------------------------------------------------------------------------------------------------------------
Harry Van Benschoten, 71 Trustee Trustee of each of the other investment companies in the Fund
(Birth date: February 18, 1928) Complex; Retired; Director, Canada Life Insurance Corporation of
6581 Ridgewood Drive New York
Naples, Florida 34108
------------------------------------------------------------------------------------------------------------------------------------
<FN>
* "Interested Person" within the meaning of Section 2(a)(19) of the Act. Mr. Hale is a Managing Director of Deutsche Asset
Management, the U.S. asset management unit of Deutsche Bank and its affiliates.
1 The "Fund Complex" consists of BT Investment Funds, BT Institutional Funds, BT Pyramid Mutual Funds, BT Advisor Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, Tax Free Money Portfolio, NY Tax Free Money Portfolio, Treasury Money
Portfolio, International Equity Portfolio, Equity 500 Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio
and BT Investment Portfolios.
2 An investment company registered under the Investment Company Act of 1940, as amended (the "Act").
3 A publicly held company with securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended.
</FN>
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Board has an Audit Committee that meets with the Trusts' and Portfolio's
independent accountants to review the financial statements of the Trust, the
adequacy of internal controls and the accounting procedures and policies of the
Trust. Each member of the Board except Mr. Hale also is a member of the Audit
Committee.
OFFICERS OF BT INVESTMENT PORTFOLIOS--
Unless otherwise specified, each officer listed below holds the same position
with the Trust and BT Investment Portfolios.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH
NAME, ADDRESS, AND AGE THE TRUSTS AND PORTFOLIO PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Daniel O. Hirsch, 45 Secretary Director, Deutsche Banc Alex. Brown Incorporated and Investment
(Birth date: March 27, 1954) Company Capital Corp. since July 1998; Assistant General Counsel,
One South Street Office of the General Counsel, United States Securities and Exchange
Baltimore, Maryland 21202 Commission from 1993 to 1998
------------------------------------------------------------------------------------------------------------------------------------
John Y. Keffer, 57 President and Chief President, Forum Financial Group L.L.C. and its affiliates; President,
(Birth date: July 14, 1942) Executive Officer ICC Distributors, Inc.(1)
ICC Distributors, Inc.
Two Portland Square
Portland, Maine 04101
------------------------------------------------------------------------------------------------------------------------------------
Charles A. Rizzo, 41 Treasurer Vice President and Department Head, Deutsche Asset Management since
(Birth date: August 5, 1958) 1998; Senior Manager, PricewaterhouseCoopers LLP from 1993 to 1998
One South Street
Baltimore, Maryland 21202
------------------------------------------------------------------------------------------------------------------------------------
<FN>
1 Underwriter/distributor for the Trust. Mr. Keffer owns 100% of the shares of ICC Distributors, Inc.
</FN>
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Messrs. Hirsch, Keffer and Rizzo also hold similar positions for other
investment companies for which ICC Distributors, or an affiliate serves as the
principal underwriter.
No person who is an officer or director of Bankers Trust is an officer or
Trustee of the Trust. No director, officer or employee of ICC Distributors, Inc.
or any of its affiliates will receive any compensation from the Trust for
serving as an officer or Trustee of the Trust.
SECURITY INCOME FUND DIRECTOR COMPENSATION TABLE--
--------------------------------------------------------------------------------
AGGREGATE COMPENSATION TOTAL COMPENSATION FROM
NAME FROM SECURITY INCOME FUND SECURITY FUND COMPLEX
--------------------------------------------------------------------------------
Donald A. Chubb, Jr. ...... $2,249 $27,000
John D. Cleland ........... N/A N/A
Penny A. Lumpkin .......... 2,166 26,000
Mark L. Morris, Jr. ....... 2,249 27,000
Maynard Oliverius ......... 2,166 26,000
James R. Schmank .......... N/A N/A
--------------------------------------------------------------------------------
*Harold G. Worswick, formerly a director of the Security Funds, received
deferred compensation in the amount of $8,386 during the year ended December
31, 1999.
--------------------------------------------------------------------------------
As of December 31, 1999 the officers and directors of Security Income Fund as
a group beneficially owned less than 1% of the total outstanding voting shares
of the Fund.
PORTFOLIO TRUSTEE COMPENSATION TABLE--
--------------------------------------------------------------------------------
AGGREGATE AGGREGATE
COMPENSATION COMPENSATION TOTAL COMPENSATION
FROM FROM FROM FUND COMPLEX
NAME OF PERSON, POSITION TRUST(1),(2) PORTFOLIO(2) PAID TO TRUSTEES(3)
--------------------------------------------------------------------------------
Charles P. Biggar, N/A $1,288 $43,750
Trustee of Portfolios
--------------------------------------------------------------------------------
Kelvin J. Lancaster, $18,567 N/A $27,500
Former Trustee of
the Trust
--------------------------------------------------------------------------------
S. Leland Dill, $17,104 $1,086 $43,750
Trustee of Trust
and Portfolios
--------------------------------------------------------------------------------
Philip Saunders, Jr., $17,645 $1,120 $45,000
Trustee of Trust
and Portfolios
--------------------------------------------------------------------------------
Martin J. Gruber,(4) N/A N/A $45,000
Trustee of the Portfolio
and Trust
--------------------------------------------------------------------------------
Richard J. Herring,(4) N/A N/A $43,750
Trustee of the Portfolio
and Trust
--------------------------------------------------------------------------------
Bruce E. Langton,(4) N/A N/A $43,750
Trustee of the Portfolio
and Trust
--------------------------------------------------------------------------------
Harry Van Benschoten,(4) N/A N/A $45,000
Trustee of the Portfolio
and Trust
--------------------------------------------------------------------------------
1 The aggregate compensation is provided for the BT Investment Funds which is
comprised of 16 funds.
2 Information is provided for the Trust's fiscal year ended September 30, 1999.
3 Aggregated information is furnished for the BT Family of Funds which consists
of the following: BT Investment Funds, BT Institutional Funds, BT Pyramid
Mutual Funds, BT Advisor Funds, BT Investment Portfolios, Cash Management
Portfolio, Treasury Money Portfolio, Tax Free Money Portfolio, NY Tax Free
Money Portfolio, International Equity Portfolio, Short Intermediate U.S.
Government Securities Portfolio, Intermediate Tax Free Portfolio, Asset
Management Portfolio, Equity 500 Index Portfolio, and Capital Appreciation
Portfolio. The compensation is provided for the fiscal year ended September
30, 1999.
4 Became a Trustee of the Portfolio and Trust after September 30, 1999.
--------------------------------------------------------------------------------
As of December 31, 1999, the Trustees and Officers of the Trust owned in the
aggregate less than 1% of the shares of the Trust (all series taken together).
As of December 31, 1999, Security Benefit Life Insurance Company ("SBL"), 700
SW Harrison Street, Topeka, Kansas, 66636-0001, owned, of record and
beneficially, 20.98% of the voting securities of Capital Preservation Fund (20%
of the total outstanding Class A shares, 46.4% of the total outstanding Class B
shares, and 77.68% of the total outstanding Class C shares). SBL is a stock life
insurance company and is incorporated under the laws of Kansas. SBL is
ultimately controlled by Security Benefit Mutual Holding Company, 700 SW
Harrison Street, Topeka, Kansas, 66636-0001, a mutual holding company organized
under the laws of Kansas.
As of December 31, 1999, the following entities owned, of record and
beneficially unless otherwise indicated, 5% or more of a class of a Fund's
outstanding securities:
------------------------------------------------------------------
NAME OF STOCKHOLDER CLASS OWNED PERCENTAGE OWNED
------------------------------------------------------------------
SBL ........................... Class A 20.0%
Roberta Miller ................ Class B 6.5%
SBL ........................... Class B 46.4%
Lucille Cunningham ............ Class B 6.8%
Betty M. Correll .............. Class B 9.2%
First National Bank of Onaga,
FBO Raymond Johnson ......... Class B 24.3%
SBL ........................... Class C 77.7%
Carol A. Thomas ............... Class C 5.5%
Deborah M. Caho ............... Class C 7.1%
------------------------------------------------------------------
INVESTMENT ADVISER -- Bankers Trust is the Portfolio's investment adviser.
Bankers Trust is a wholly owned subsidiary of Deutsche Bank. Deutsche Bank is a
banking company with limited liability organized under the laws of the Federal
Republic of Germany. Deutsche Bank is the parent company of a group consisting
of banks, capital markets companies, fund management companies, mortgage banks,
a property finance company, installment financing and leasing companies,
insurance companies, research and consultancy companies and other domestic and
foreign companies.
Bankers Trust may have deposit, loan and other commercial banking
relationships with the issuers of obligations which may be purchased on behalf
of the Portfolio, including outstanding loans to such issuers which could be
repaid in whole or in part with the proceeds of securities so purchased. Such
affiliates deal, trade and invest for their own accounts in such obligations and
are among the leading dealers of various types of such obligations. Bankers
Trust has informed the Portfolio that, in making its investment decisions, it
does not obtain or use material inside information in its possession or in the
possession of any of its affiliates. In making investment recommendations for
the Portfolio, Bankers Trust will not inquire or take into consideration whether
an issuer of securities proposed for purchase or sale by the Portfolio is a
customer of Bankers Trust, its parent or its subsidiaries or affiliates and, in
dealing with its customers, Bankers Trust, its parent, subsidiaries and
affiliates will not inquire or take into consideration whether securities of
such customers are held by any fund managed by Bankers Trust or any such
affiliate.
For the fiscal year ended September 30, 1999, Bankers Trust earned $64,673
for compensation of investment advisory services provided to the Portfolio. For
the same period, Bankers Trust reimbursed $42,363 to the Portfolio to cover
expenses.
At a Special Meeting held on October 8, 1999, shareholders of the Portfolio
also approved a new investment advisory agreement with Morgan Grenfell, Inc. As
of October 5, 1999, Morgan Grenfell, Inc. has been renamed Deutsche Asset
Management Inc. ("DAMI"). The new investment advisory agreement with DAMI may be
implemented within two years of the date of the Special Meeting upon approval of
a majority of the members of the Board of Trustees of the Portfolio who are not
"interested persons" ("Independent Trustees"). Shareholders of the Portfolio
also approved a new sub-investment advisory agreement among the Portfolio, DAMI
and Bankers Trust under which Bankers Trust may perform certain of DAMI's
responsibilities, at DAMI's expense, upon approval of the Independent Trustees,
within two years of the date of the Special Meeting. DAMI is a subsidiary of
Deutsche Asset Management Ltd., a wholly owned subsidiary of Deutsche Morgan
Grenfell Group PLC, an investment holding company which is, in turn, a wholly
owned subsidiary of Deutsche Bank.
ADMINISTRATOR -- Pursuant to an Administrative Services and Transfer Agency
Agreement with Security Income Fund, dated April 1, 1987 as amended April 30,
1999, Security Management Company, LLC ("SMC") acts as the administrative agent
for the Fund and as such performs administrative functions and the bookkeeping,
accounting and pricing function for the Fund. For these services SMC receives,
on an annual basis .09% of the average net assets of the fund, calculated daily
and payable monthly. Under this Agreement SMC also performs the transfer agency
function for the Fund. As such, SMC performs all shareholder servicing
functions, mailing shareholder communications and acting as dividend disbursing
agent. For the transfer agency services, SMC receives an annual maintenance fee
of $8 per account, a fee of $1 per shareholder transaction, and a fee of $1 per
dividend transaction. Under a sub-administration agreement between SMC and
Bankers Trust, Bankers Trust has agreed to provide certain fund accounting
services to the fund, including calculation of the Fund's daily NAV. For these
services, SMC pays Bankers Trust a fee of $14,000 per year.
Under an administration and services agreements, Bankers Trust is obligated
on a continuous basis to provide such administrative services as the Board of
Trustees of the Trust and the Portfolio reasonably deem necessary for the proper
administration of the Trust and the Portfolio. Bankers Trust will generally
assist in all aspects of the Fund's and Portfolio's operations; supply and
maintain office facilities (which may be in Bankers Trust's own offices),
statistical and research data, data processing services, clerical, accounting,
bookkeeping and record keeping services (including without limitation the
maintenance of such books and records as are required under the 1940 Act and the
rules thereunder, except as maintained by other agents), executive and
administrative services, and stationary and office supplies; prepare reports to
shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and
various state Blue Sky authorities; supply supporting documentation for meetings
of the Board of Trustees; provide monitoring reports and assistance regarding
compliance with Declarations of Trust, by-laws, investment objectives and
policies and with Federal and state securities laws; arrange for appropriate
insurance coverage; calculate net asset values, net income and realized capital
gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
For the fiscal year ended September 30, 1999, Bankers Trust earned $4,620 as
compensation for administrative and other services provided to the Portfolio.
During the same period, Bankers Trust reimbursed $3,026 to the Portfolio to
cover expenses.
Pursuant to a separate Management Services Agreement, SMC also performs
certain other services on behalf of the Fund. Under this Agreement, SMC provides
feeder fund management and administrative services to the Fund which include
monitoring the performance of the Portfolio, coordinating the Fund's
relationship with the Portfolio, communicating with the Fund's Board of
Directors and shareholders regarding the Portfolio's performance and the Fund's
two tier structure, and in general, assisting the Board of Directors of the Fund
in all aspects of the administration and operation of the Fund. For these
services, the Fund pays SMC a fee at the annual rate of .20% of its average
daily net assets, calculated daily and payable monthly.
During the fiscal year ended September 30, 1999, the Fund paid the following
amounts to the Administrator for its services.
-----------------------------------------------------------------
1999(1)
-----------------------------------------------------------------
Administrative service fees paid to Administrator...... $7,181
Transfer Agency service fees paid to Administrator..... 464
Reimbursement of expenses by Administrator............. ---
-----------------------------------------------------------------
1 Capital Preservations Fund's figures are based on the period
May 3, 1999 (date of inception) to September 30, 1999.
-----------------------------------------------------------------
For the fiscal year ended September 30, 1999, the Fund paid the Administrator
$14,567 for its services under the Management Services Agreement.
CUSTODIAN AND TRANSFER AGENT -- Bankers Trust, 130 Liberty Street (One Bankers
Trust Plaza), New York, New York 10006, serves as Custodian for the Portfolio
pursuant to the administration and services agreements. As Custodian, it holds
the Portfolio's assets. Bankers Trust also serves as transfer agent of the
Portfolio pursuant to the administration and services agreement. Bankers Trust
may be reimbursed by the Portfolio for its out-of-pocket expenses. Bankers Trust
will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
UMB Bank, N.A. 928 Grand Avenue, Kansas City, Missouri 64106 serves as Custodian
for the Fund and as such, holds all the Fund's assets.
BANKING REGULATORY MATTERS -- Bankers Trust has been advised by its counsel that
in its opinion Bankers Trust may perform the services for the Portfolio
contemplated by the Advisory Agreement and other activities for the Portfolio
described in the Prospectus and this SAI without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. However, counsel has
pointed out that future changes in either Federal or state statutes and
regulations concerning the permissible activities of banks or trust companies,
as well as future judicial or administrative decisions or interpretations of
present and future statutes and regulations, might prevent Bankers Trust from
continuing to perform those services for the Portfolio. State laws on this issue
may differ from the interpretations of relevant Federal law and banks and
financial institutions may be required to register as dealers pursuant to state
securities law. If the circumstances described above should change, the Boards
of Directors would review the relationships with Bankers Trust and consider
taking all actions necessary in the circumstances.
INDEPENDENT AUDITORS -- Ernst & Young LLP, Two Commerce Square, 2001 Market
Street, Philadelphia, Pennsylvania, 19103 , acts as independent auditors of
Security Income Fund and the Portfolio.
ORGANIZATION OF SECURITY INCOME FUND
Security Income Fund was organized as a Kansas corporation on April 20, 1965 and
is registered with the Securities and Exchange Commission as an investment
company. Such registration does not involve supervision by the Securities and
Exchange Commission of the management or policies of the Fund.
The Articles of Incorporation of Security Income Fund provides for the
issuance of shares of common stock in one or more classes or series.
Security Income Fund has authorized the issuance of an indefinite number of
shares of capital stock of $1.00 par value and currently issues its shares in
five series, Corporate Bond Fund, Limited Maturity Bond Fund, U.S. Government
Fund, High Yield Fund and Capital Preservation Fund. The shares of each Series
of Security Income Fund represent a pro rata beneficial interest in that Series'
net assets and in the earnings and profits or losses derived from the investment
of such assets.
Each Series of Security Income Fund currently issues two classes of shares
except Capital Preservation Fund which issues three classes of shares. Each
class of shares participates proportionately based on their relative net asset
values in dividends and distributions and have equal voting, liquidation and
other rights except that (i) expenses related to the distribution of each class
of shares or other expenses that the Board of Directors may designate as class
expenses from time to time, are borne solely by each class; (ii) each class of
shares has exclusive voting rights with respect to any Distribution Plan adopted
for that class; (iii) each class has different exchange privileges; and (iv)
each class has a different designation. When issued and paid for, the shares of
each Series of Security income Fund will be fully paid and nonassessable. Shares
may be exchanged as described under "Exchange Privilege," in the prospecting but
will have no other preference, conversion, exchange or preemptive rights. Shares
are transferable, redeemable and assignable and have cumulative voting
privileges for the election of directors.
On certain matters, such as the election of directors, all shares of the
Series of Security Income Fund vote together with each share having one vote.
Under certain circumstances, the shareholders of one series of Security Income
Fund could control the outcome of these votes. On other matters affecting a
particular Series, such as the investment advisory contract or the fundamental
policies, only shares of that Series are entitled to vote, and a majority vote
of the shares of that Series is required for approval of the proposal.
Security Income Fund does not generally hold annual meetings of shareholders
and will do so only when required by law. Shareholders may remove directors from
office by vote cast in person or by proxy at a meeting of shareholders. Such a
meeting will be called at the written request of 10% of Security Income Fund's
outstanding shares.
ORGANIZATION OF THE TRUST
BT Investment Funds was organized on July 21, 1986, under the name BT Tax-Free
Investment Trust, and assumed its current name on May 16, 1988. The shares of
each series participate equally in the earnings, dividends and assets of the
particular series. The Trusts may create and issue additional series of shares.
Each Trust's Declaration of Trust permits the Trustees to divide or combine the
shares into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in series. Each share represents an equal
proportionate interest in a series with each other share. Shares when issued are
fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held.
Shares of the Trust do not have cumulative voting rights, which means that
holders of more than 50% of the shares voting for the election of Trustees can
elect all Trustees. Shares are transferable but have no preemptive, conversion
or subscription rights. Shareholders generally vote by Fund, except with respect
to the election of Trustees.
Massachusetts law provides that shareholders could under certain
circumstances be held personally liable for the obligations of the Trust.
However, the Trust's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Trust and requires that notice of this disclaimer be
given in each agreement, obligation or instrument entered into or executed by
the Trust or a Trustee. The Declaration of Trust provides for indemnification
from the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations, a possibility that the Trust believes is remote. Upon payment of
any liability incurred by the Trust, the shareholder paying the liability will
be entitled to reimbursement from the general assets of the Trust. The Trustees
intend to conduct the operations of the Trust in a manner so as to avoid, as far
as possible, ultimate liability of the shareholders for liabilities of the
Trust.
Whenever a Trust is requested to vote on matters pertaining to a Portfolio,
the Trust will vote its shares without a meeting of shareholders of the
respective Fund if the proposal is one, which if made with respect to the Fund,
would not require the vote of shareholders of the Fund as long as such action is
permissible under applicable statutory and regulatory requirements. For all
other matters requiring a vote, a Trust will hold a meeting of shareholders of
its respective Fund and, at the meeting of the investors in the Portfolio, the
Trust will cast all of its votes in the same proportion as votes in all its
shares at the Portfolio meeting, other investors with a greater pro rata
ownership of the Portfolio could have effective voting control of the operations
of the Portfolio.
TAXATION
TAXATION OF THE FUND -- The Fund intends to qualify annually to be treated as a
regulated investment company under the Code. To qualify for that treatment, the
Fund must, among other things, (a) derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loans
and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures or forward
contracts) derived with respect to its business of investing in securities or
those currencies (the "Income Requirement"), (b) diversify its holdings so that,
at the end of each quarter of its taxable year, (i) at least 50% of the value of
its assets is represented by cash and cash items (including receivables), U.S.
government securities, securities of other regulated investment companies and
other securities, with such other securities of any one issuer limited to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 10% of the issuer's outstanding voting securities and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. government securities or the securities of other
regulated investment companies), and (c) distribute for each taxable year at
least 90% of its investment company taxable income (generally consisting of
interest, dividends and the excess of net short-term capital gain over net
long-term capital loss).
The Fund will be subject to a nondeductible 4% federal excise tax to the
extent it fails to distribute by the end of any calendar year substantially all
of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus any undistributed amount
from the prior year.
The Fund, as an investor in the Portfolio, will be deemed to own a
proportionate share of the Portfolio's assets, and to earn a proportionate share
of the Portfolio's income, for purposes of determining whether the Fund
satisfies all the requirements described above to qualify as a regulated
investment company. See the next section for a discussion of the tax
consequences to the Fund of hedging transactions engaged in by the Portfolio.
TAXATION OF THE PORTFOLIO -- The Portfolio will be treated as a separate
partnership for federal income tax purposes and will not be a "publicly traded
partnership." As a result, the Portfolio will not be subject to federal income
tax. Instead, the Fund and other investors in the Portfolio will be required to
take into account, in computing their federal income tax liability, their
respective shares of the Portfolio's income, gains, losses, deductions and
credits, without regard to whether they have received any cash distributions
from the Portfolio. The Portfolio also will not be subject to state income or
franchise tax.
Because, as noted above, the Fund will be deemed to own a proportionate share
of the Portfolio's assets, and to earn a proportionate share of the Portfolio's
income, for purposes of determining whether the Fund satisfies the requirements
to qualify as a regulated investment company, the Portfolio intends to conduct
its operations so that the Fund will be able to satisfy all those requirements.
Distributions received by the Fund from the Portfolio (whether pursuant to a
partial or complete withdrawal or otherwise) generally will not result in the
Fund's recognizing any gain or loss for federal income tax purposes, except that
(a) gain will be recognized to the extent any cash that is distributed exceeds
the Fund's basis for its interest in the Portfolio prior to the distribution,
(b) income or gain will be realized if the distribution is in liquidation of the
Fund's entire interest in the Portfolio and includes a disproportionate share of
any unrealized receivables held by the Portfolio, and (c) gain or loss will be
recognized if a liquidation distribution consists solely of cash and/or
unrealized receivables. The Fund's basis for its interest in the Portfolio
generally will equal the amount of cash and the basis of any property the Fund
invests in the Portfolio, increased by the Fund's share of the Portfolio's net
income and gains and decreased by (i) the amount of any cash and the basis of
any property distributed from the Portfolio to the Fund and (ii) the Fund's
share of the Portfolio's losses, if any.
The Portfolio's use of hedging strategies, such as writing (selling) and
purchasing options and futures contracts, involves complex rules that will
determine for income tax purposes the amount, character and timing of
recognition of the gains and losses it realizes in connection therewith. Gains
from options and futures contracts derived by the Portfolio with respect to its
business of investing in securities will qualify as permissible income for the
Fund under the Income Requirement.
Certain futures and foreign currency contracts in which the Portfolio may
invest may be subject to section 1256 of the Code ("section 1256 contracts").
Any section 1256 contracts held by the Portfolio at the end of each taxable
year, other than contracts subject to a "mixed straddle" election made by the
Portfolio, must be "marked-to-market" (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the
result that unrealized gains or losses will be treated as though they were
realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section
1256 contracts, will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss. Section 1256
contracts also may be marked-to-market for purposes of the 4% excise tax
mentioned previously.
Code section 1092 (dealing with straddles) also may affect the taxation of
options and futures contracts in which the Portfolio may invest. Section 1092
defines a "straddle" as offsetting positions with respect to personal property;
for these purposes, options and futures contracts are personal property. Under
that section, any loss from the disposition of a position in a straddle
generally may be deducted only to the extent the loss exceeds the unrealized
gain on the offsetting position(s) of the straddle; in addition, these rules may
apply to postpone the recognition of loss that otherwise would be recognized
under the mark-to-market rules discussed above. The regulations under section
1092 also provide certain "wash sale" rules, which apply to transactions where a
position is sold at a loss and a new offsetting position is acquired within a
prescribed period, and "short sale" rules applicable to straddles. If the
Portfolio makes certain elections, the amount, character and timing of
recognition of gains and losses from the affected straddle positions would be
determined under rules that vary according to the elections made. Because only a
few of the regulations implementing the straddle rules have been promulgated,
the tax consequences to the Portfolio of straddle transactions are not entirely
clear.
If the Portfolio has an "appreciated financial position"--generally, an
interest (including an interest through an option, futures or forward contract,
or short sale) with respect to any debt instrument (other than "straight debt")
or partnership interest the fair market value of which exceeds its adjusted
basis--and enters into a "constructive sale" of the same or substantially
similar property, the Portfolio will be treated as having made an actual sale
thereof, with the result that gain will be recognized at that time. A
constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract entered into by the
Portfolio or a related person with respect to the same or substantially similar
property. In addition, if the appreciated financial position is itself a short
sale or such a contract, acquisition of the underlying property or substantially
similar property will be deemed a constructive sale. The foregoing will not
apply, however, to any transaction during any taxable year that otherwise would
be treated as a constructive sale if the transaction is closed within 30 days
after the end of that year and the Portfolio holds the appreciated financial
position unhedged for 60 days after that closing (I.E., at no time during that
60-day period is the Portfolio's risk of loss regarding that position reduced by
reason of certain specified transactions with respect to substantially similar
or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale or granting an option to buy
substantially identical stock or securities).
OTHER TAXATION --The investment by the Fund in the Portfolio should not cause
the Fund to be liable for any income or franchise tax in the State of New York.
The Portfolio is organized as a New York trust. The Portfolio is not subject
to any income or franchise tax in the State of New York or the State of Kansas.
If the Fund fails to qualify as a RIC for any taxable year, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
the Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
FOREIGN WITHHOLDING TAXES -- Income received and gains realized by the Portfolio
from sources within foreign countries may be subject to withholding and other
taxes imposed by those countries that would reduce the yield and/or total return
on its securities. Tax conventions between certain countries and the United
States may reduce or eliminate these foreign taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by
foreign investors.
FINANCIAL STATEMENTS
The financial statements for the Fund and the Portfolio for the fiscal year
ended September 30, 1999, are incorporated herein by reference to the Annual
Report to shareholders for the Fund and Portfolio dated September 30, 1999.
Copies of the Fund's and the Portfolio's Annual Report are provided to every
person requesting the Statement of Additional Information.
<PAGE>
APPENDIX A
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DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
AAA -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds rated Baa are considered as medium-grade obligations, i.e. they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such, bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA -- Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both (good and bad times over the future). Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA -- Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds and issued so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P'S CORPORATE BOND RATINGS
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher-rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to weakened capacity to pay interest and repay principal for debt
in this category than in higher-rated categories.
BB -- Debt rate BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B -- Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal.
CC -- Debt rated CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C -- The rating C is typically applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI -- The rating CI is reserved for income bonds on which no interest is being
paid.
D -- Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' LONG-TERM DEBT RATINGS
AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A- -- Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
BBB+, BBB, BBB- -- Below-average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligation when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC -- Well below investment-grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD -- Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments.
DP -- Preferred stock with dividend arrearages.
DESCRIPTION OF MOODY'S SHORT-TERM DEBT RATINGS
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leasing
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an acceptable
capacity for repayment of short-term promissory obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
DESCRIPTION OF S&P SHORT-TERM ISSUER CREDIT RATINGS
A-1 -- An obligor rated `A-1' has STRONG capacity to meet its financial
commitments. It is rated in the highest category by Standard & Poor's. Within
this category, certain obligors are designated with a plus sign (+). This
indicates that the obligor's capacity to meet its financial commitments is
EXTREMELY STRONG.
A-2 -- An obligor rated `A-2' has SATISFACTORY capacity to meet its financial
commitments. However, it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 -- An obligor rated `A-3' has ADEQUATE capacity to meet its financial
obligations. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitments.
DESCRIPTION OF DUFF & PHELPS' COMMERCIAL PAPER RATINGS
D-1+ -- Highest certainty of timely payment. Short term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk free U.S. Treasury short term
obligations.
D-1 -- Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1- -- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2 -- Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
D-3 -- Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
DESCRIPTION OF MOODY'S INSURANCE FINANCIAL STRENGTH RATINGS
AAA -- Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
AA -- Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A -- Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA -- Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
BA -- Insurance companies rated Ba offer questionable financial security. Often
the ability of these companies to meet policyholder obligations maybe very
moderate and thereby not well safeguarded in the future.
B -- Insurance companies rated B offer poor financial security. Assurance of
punctual payment of policyholder obligations over any long period of time is
small.
CAA -- Insurance companies rated Caa offer very poor financial security. They
may be in default on their policyholder obligations or there may be present
elements of danger with respect to punctual payment of policyholder obligations
and claims.
CA -- Insurance companies rated Ca offer extremely poor financial security. Such
companies are often in default on their policyholder obligations or have other
marked shortcomings.
C -- Insurance companies rated C are the lowest rated class of insurance company
and can be regarded as having extremely poor prospects of ever offering
financial security.
Numeric modifiers: Numeric modifiers are used to refer to the ranking within
the group -- one being the highest and three being the lowest. However, the
financial strength of companies within a generic rating symbol (Aa, for example)
is broadly the same.
DESCRIPTION OF S&P CLAIMS PAYING ABILITY RATING DEFINITIONS
SECURE RANGE -- AAA to BBB
"AAA" -- Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
"AA" -- Excellent financial security. Capacity to meet policyholder obligations
is strong under a variety of economic and underwriting conditions.
"A" -- Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
"BBB" -- Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
VULNERABLE RANGE -- BB to CCC
"BB" -- Financial security may be adequate, but capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions.
"B" -- Vulnerable financial security. Currently able to meet policyholder
obligations, but capacity to meet policyholder obligations is particularly
vulnerable to adverse economic and underwriting conditions.
"CCC" -- Extremely vulnerable financial security. Continued capacity to meet
policyholder obligations is highly questionable unless favorable economic and
underwriting conditions prevail.
"R" -- Regulatory action. As of the date indicated, the insurer is under
supervision of insurance regulators following rehabilitation, receivership,
liquidation, or any other action that reflects regulatory concern about the
insurer's financial condition. Information on this status is provided by the
National Association of Insurance Commissioners and other regulatory bodies.
Although believed to be accurate, this information is not guaranteed. The "R"
rating does not apply to insurers subject only to nonfinancial actions such as
market conduct violations.
Plus (+) or minus (-) Ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DUFF & PHELPS' CLAIMS PAYING ABILITY RATINGS
AAA -- Highest claims paying ability. Risk factors are negligible.
AA+, AA, AA- -- Very high claims paying ability. Protection factors are strong.
Risk is modest, but may vary slightly over time due to economic and/or
underwriting conditions.
A+, A, A- -- High claims paying ability. Protection factors are average and
there is an expectation of variability in risk over time due to economic and/or
underwriting conditions.
BBB+, BBB, BBB- -- Adequate claims paying ability. Protection factors are
adequate. There is considerable variability in risk over time due to economic
and/or underwriting conditions.
BB+, BB, BB- -- Uncertain claims paying ability and less than investment grade
quality. However, the company is deemed likely to meet these obligations when
due. Protection factors will vary widely with changes in economic and/or
underwriting conditions.
B+, B, B- -- Possessing risk that policyholder and contractholder obligations
will not be paid when due. Protection factors will vary widely with changes in
economic and underwriting conditions or company fortunes.
CCC -- There is substantial risk that policyholder and contractholder
obligations will not be paid when due. Company has been or is likely to be
placed under state insurance department supervision.
DD -- Company is under an order of liquidation.
<PAGE>
APPENDIX B
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REDUCED SALES CHARGES
CLASS A SHARES -- Initial sales charges may be reduced or eliminated for persons
or organizations purchasing Class A shares of the Funds alone or in combination
with Class A shares of certain other Security Funds.
For purposes of qualifying for reduced sales charges on purchases made
pursuant to Rights of Accumulation or a Statement of Intention (also referred to
as a "Letter of Intent"), the term "Purchaser" includes the following persons:
an individual, his or her spouse and children under the age 21; a trustee or
other fiduciary of a single trust estate or single fiduciary account established
for their benefit; an organization exempt from federal income tax under Section
501(c)(3) or (13) of the Internal Revenue Code; or a pension, profit-sharing or
other employee benefit plan whether or not qualified under Section 401 of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION -- A Purchaser may combine all previous purchases with
his or her contemplated current purchases of Class A Shares of a Fund, for the
purpose of determining the sales charge applicable to the current purchase. For
example, an investor who already owns Class A shares of a Fund either worth
$90,000 at the applicable current offering price or purchased for $90,000 and
who invests an additional $25,000, is entitled to a reduced front-end sales
charge of 2.5% on the latter purchase. The Underwriter must be notified when a
sale takes place which would qualify for the reduced charge on the basis of
previous purchases subject to confirmation of the investor's holding through the
Fund's records. Rights of accumulation apply also to purchases representing a
combination of the Class A shares of the Fund, together with other Class A
shares of the Security Funds other than Cash Fund.
STATEMENT OF INTENTION -- A Purchaser may sign a Statement of Intention, which
may be signed within 90 days after the first purchase to be included thereunder,
in the form provided by the Underwriter covering purchases of Class A shares of
the Fund, together with other Class A shares of the Security Funds other than
Cash Fund to be made within a period of 13 months (or a 36-month period for
purchases of $1 million or more) and thereby become eligible for the reduced
front-end sales charge applicable to the actual amount purchased under the
Statement. Five percent of the amount specified in the Statement of Intention
will be held in escrow shares until the Statement is completed or terminated.
The shares so held may be redeemed by the Fund if the investor is required to
pay additional sales charges which may be due if the amount of purchases made by
the Purchaser during the period the Statement is effective is less than the
total specified in the Statement of Intention.
A Statement of Intention may be revised during the 13-month period (or a
36-month period for purchases of $1 million or more). Additional Class A shares
received from reinvestment of income dividends and capital gains distributions
are included in the total amount used to determine reduced sales charges. The
Statement is not a binding obligation upon the investor to purchase or any Fund
to sell the full indicated amount. A Statement of Intention form may be obtained
from the Fund. An investor considering signing such an agreement should read the
Statement of Intention carefully.
REINSTATEMENT PRIVILEGE -- Stockholders who redeem their Class A shares of the
Fund have a one-time privilege (1) to reinstate their accounts by purchasing
shares without a sales charge up to the dollar amount of the redemption
proceeds, or (2) to the extent the redeemed shares would have been eligible for
the exchange privilege, to purchase Class A shares of another of the Security
Funds, without a sales charge up to the dollar amount of the redemption
proceeds. Written notice and a check in the amount of the reinvestment from
eligible stockholders wishing to exercise this reinstatement privilege must be
received by a fund within 30 days after the redemption request was received (or
such longer period as may be permitted by rules and regulations promulgated
under the Investment Company Act of 1940). The reinstatement or exchange will be
made at the net asset value next determined after the reinvestment is received
by the Fund. Stockholders making use of the reinstatement privilege should note
that any gains realized upon the redemption will be taxable while any losses may
be deferred under the "wash sale" provision of the Internal Revenue Code.